Can I Withdraw My 401(k) Before Filing for Divorce?

By Rob Jennings J.D.

Although a 401(k) may constitute marital property in your divorce, it remains under your control, giving you the option of withdrawing the funds if you choose to do so. Just because you can do it, however, doesn't mean you should. Before making any withdrawals, understand how courts treat 401(k) funds and what penalties you could face.

Although a 401(k) may constitute marital property in your divorce, it remains under your control, giving you the option of withdrawing the funds if you choose to do so. Just because you can do it, however, doesn't mean you should. Before making any withdrawals, understand how courts treat 401(k) funds and what penalties you could face.

Marital Property

Although state law on marital property division varies, 401(k) contributions made during marriage -- and any increases in value on those contributions--generally constitute marital property in a divorce. This means that the judge in your case can divide those funds -- even if you're the one who earned them. In some jurisdictions, the judge can award a portion or your entire 401(k) to your spouse. Depending upon the circumstances of your withdrawals, your actions may be viewed as attempts to hide marital funds from both your spouse and the judge.

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Withdrawals

When you withdraw 401(k) funds, the court can treat you as having taken an advance on your share of marital property, meaning you will likely have to reimburse your spouse with other funds. Depending upon your reasons for making the withdrawals, the court may saddle you with a pre-tax, pre-penalty valuation of the funds. Since 401(k) withdrawals are taxed at your ordinary income rate and carry penalties if done early, you could have to compensate your spouse with more value than you yourself received.

Reasons for Withdrawal

If you withdraw funds due to financial hardship, the court may not require you to reimburse the other spouse -- depending upon what you did with the money. Paying down marital debt or preventing the repossession of marital property can benefit both parties. If your spouse has a child or spousal support obligation that he ignores, you may get away with drawing down your 401(k) on the grounds that you may not have had to do it had your spouse paid you like he should have.

Alternatives to Withdrawal

Some individuals withdraw funds from their 401(k) to "pay off" their spouse, which triggers the imposition of taxes and early withdrawal penalties. These expenses are usually unnecessary; when you need to divide a 401(k) because of a divorce, a qualified domestic relations order (QDRO) can allow you to transfer funds to your spouse without paying those taxes and penalties. Instead of pulling funds out to pay down marital debt, consider a joint bankruptcy. Under current law, you can obtain a discharge of some or all of your debt while keeping your retirement assets intact.

Protection of Other Spouse

State law can protect the other spouse in a divorce where there exists a possibility that the 401(k) owner may withdraw the funds. The divorce summons may contain a restraining order preventing the served spouse from withdrawing or selling marital assets. Parties can also ask the court for temporary restraining orders to prevent the disappearance of retirement funds during the divorce process. These restraining orders can be served on the 401(k) sponsor so that if the other spouse tries to make withdrawals in violation of the order, the account can be frozen.

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401(k) Rights in a Divorce

References

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What Happens in a Divorce When Both Own a 401(k)?

One of the most complex decisions a divorcing couple faces is how to divide retirement savings accumulated during marriage. In addition to the marital home, retirement plans are often the most significant asset spouses have. Just like other marital property, a 401(k) can be divided in a divorce, but it usually requires complicated paperwork and tax smarts. When both spouses have their own retirement plans, division can sometimes be easier.

Proving Money Is Inherited

Each state has its own laws regarding the division of marital property in a divorce. Community property states, which stand in the minority, require courts to divide an estate equally, whereas equitable distribution states -- the majority -- seek to divide estates equitably, or fairly. In both types of jurisdictions, inherited money is usually considered separate property and not divisible in divorce. The burden of proving that certain funds represent your inheritance, however, will likely rest on you.

How to Separate Property Appreciation in Marriage

Going through a separation or divorce means dividing different types of assets. Personal property is fairly easy to divide: whoever has it, keeps it or gives it to the other spouse. A couple can divide their real estate with a court order or deed. A bank can transfer funds from joint accounts into individual accounts. Valuing and dividing property appreciation, however, may require an alternative solution.

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