Cashing out one’s portion of a 401(k)

On Behalf of | Jan 25, 2021 | Family Law

While one’s divorce in Virginia likely brings a certain degree of relief, it also may come with some trepidation due to the uncertainties they now may face. Financial uncertainty may be particularly significant if they were not the primary income earners in their marital home.

One might assume that the funds needed to secure vocational training to pay for new housing will come from alimony, yet such assistance is not guaranteed. A more reliable source of an immediate infusion of income may instead come from a 401(k).

Dividing up a 401(k) in a divorce

Many may find it surprising that a 401(k) is subject to property division. Yet the contributions made to such an account during a marriage come from shared income (thus making those contributions marital assets). According to the 401(k) Help Center, typically the court mandates that a 401(k) plan provider split those contributions into two separate accounts (with each side then assuming control over their respective funds. Yet cashing out one’s portion might also be an option.

Weighing the pros and cons of cashing out

The website SmartAsset.com reports that while an early withdrawal from a 401(k) results in a tax penalty, divorce is one of the few cases where withdrawals are not penalized. However, that does not mean that there are no potential drawbacks to this decision. First of all, one must still pay income tax on whatever disbursement they receive. Plus, one gives up the potential growth that their funds may experience from years of earned interest and investment returns. If one is still several years away from retirement, that growth may be significant. Therefore, one should consider whether the amount they receive now from cashing out benefits them more than what that potential retirement income growth may be.