The 401(k) accounts are listed as a good retirement reserve. At the end of the day, they give the worker the opportunity to make contributions from his paycheck, to deduct that amount from the contributions from taxes, to earn money with investments and compound interest and to maximize that figure, provided that the employer matches employee contributions. If you’re going through a divorce, you need to know all about withdrawing what’s rightfully yours from your 401(k).
The 401(k) accounts are subject to some tax rules and requirementssuch as a fine or penalty of 10% of the amount withdrawn if the distribution is made before the minimum age limit allowed, which is 59 ½ years of age, and the payment of federal and state income taxes corresponding.
But perhaps it is in the face of the most unfortunate or unexpected events in life that people think about whether they should reach for the funds saved in their accounts. For example, you may be wondering: “Can I withdraw my 401(k) due to divorce?” Well, it is not so recommendable, especially because in some states of the country that fund – to a certain extent – would be part of the marital property.
- 1 What is the conjugal partnership in marriage?
What is the conjugal partnership in marriage?
The marital partnership, also known as marital property, marital community or joint property, is the set of assets, assets and debts (yes, we are talking about heritage at its best) that have been acquired after the date of the marriage. Now, can the 401(k) account be part of this conjugal community? Yes, at least if the laws of your state allow it.
Two scenarios can happen here. The first, that you have opened your account after getting married. If you live in a state where 401(k) accounts are considered marital property, then half of that money would belong to your husband or wife. The second would be that the 401(k) account was opened before the marriage, but contributions continued after the date of the legal union. In this case, that surplus accumulated after the marriage would form part of the conjugal community.
Note: If you or your employer—or both—have made contributions to your 401(k) account during the marriage, those amounts are considered marital property during the marriage process. divorce. Early withdrawals made to give the ex-spouse their due will be taxed, and these taxes will also become part of the marital property. Therefore, both the assets and the profits and debts are divided in half.
Can my spouse withdraw money from my 401(k)?
Not necessarily. A spouse or former spouse cannot withdraw money from your 401(k) account without your express consent or without a court order authorizing them to do so, for example, in the event of past due support. But let’s see this in more detail.
Both contributions made by you and those made by your employer will form part of the marital property as long as they were made during the marriage. The same will apply to interest and growth that accrues from the date of the wedding to the date of the divorce.. Contributions and growth prior to marriage are yours and therefore do not belong to the community of assets.
So if you’re facing a divorce and you make an early withdrawal, you will face an additional problem in addition to paying taxes and the usual penalties, that is, the payment of the 10% fine. Why? Because your spouse will be entitled to a portion of what you just withdrew from the account, unless you can prove that you spent it for the benefit of the family.
What does this mean? That if you use the money for personal purposes, you must compensate your spouse by paying him the asset that corresponds to him according to the division of assets that has resulted in the divorce process.
What if, instead of a withdrawal, I borrow from my 401(k)?
Distributions from your 401(k) account before age 59½ are subject to a 10% early withdrawal penalty. In addition, you will need to include the amount withdrawn on your tax return. If the withdrawal occurs before the divorce, the owner of the account, which is you, will take the lion’s share of paying taxes and penalties.
Otherwise, you’ll have to pay the early withdrawal penalty and taxes on that remaining balance.
Note: There is one exception to these limits. If your 401(k) account balance is less than $10,000, you will be able to borrow the entire account.
In March 2020, Donald Trump, President of the United States, signed the CARES Act, relaxing some of the rules governing 401(k) accounts and other retirement plans. If you want to know more about the new limits, loans, etc.; you can take a look at our post”Withdraw the 401(k) without penalty for Coronavirus, is it possible?”
Watch out: If you take out a loan and change jobs before paying it off in full, you’ll have to pay it back by a certain date or, if you can’t, pay the penalty and income taxes on the amount owed. If you gave part of the loan proceeds to your spouse prior to the divorce, you will need to include this in negotiations about the general division of marital property.
What happens to my 401(k) during the division of marital property?
Generally, the best thing to do in the face of divorce is to leave your 401(k) account intact, at least until the divorce decree and property separation agreement are final. Why? Because withdrawals made pursuant to a divorce decree or dissolution of marriage settlement agreement are penalty-free and sometimes even tax-free.
And it is that, the court will issue a qualified domestic relations order, known as QDROwhich will direct your plan administrator to transfer your ex-spouse’s portion, possibly to an IRA in their name or through a check or cash payment.
As long as withdrawals are made in accordance with the QDRO, you will not have to pay taxes or penalties. If your spouse takes the cash, he or she will not have to pay the 10% fine, but yes income taxes. And if you want to transfer it to your own 401(k) account, you can only do so if you work for your same employer.
401(k)s and Divorces: Other Factors to Consider
Some 401(k) plan administrators will not approve an early withdrawal without the consent of the owning spouse, even if you are married and part of the fund belongs to your husband or wife.. If you believe that this is not the case for you and that your spouse might try to make a withdrawal without your consent, talk to your attorney about requesting a temporary freeze on the investment account.