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Detailing the handling of 401(k) funds during divorce

Property division proceedings are often one of the most complex (and contentious) aspects of any divorce case in California. Many people may feel prepared for whatever may come up during this portion of their proceedings, yet one element that often catches them by surprise is the fact that 401(k) accounts are subject to equitable division.

Past posts on this blog touched upon the fact that divorce can affect one’s pension, so it makes sense that a 401(k) account would be as well. In truth, one’s entire 401(k) may be subject to division, but rather only those funds contributed to the account during their marriage (as those typically come from marital income). 

Dividing up a 401(k)

During a divorce case, the court issues a Qualified Domestic Relations Order. This order allows a 401(k) plan sponsor to authorize a disbursement to someone other than the plan holder. This paves the way for the sponsor to divide up the account into two, with both sides to a divorce case then gaining control over their respective accounts. 

While this may be the most common way to deal with a 401(k) during a divorce, one might wonder whether cashing out whatever portion of a 401(k) they have coming to them is an option. While taking a disbursement prior to reaching the age of retirement typically nets an early withdrawal penalty, the website reports that such an action taken during a divorce will not draw a penalty. 

Keeping the full 401(k)

A 401(k) account holder may also wonder whether they can keep the full value of their accounts. According to the 401(k) Help Center, this is an option, yet to do so, one typically must relinquish their claim to another marital asset of comparable value in exchange.