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Strategies for dealing with a 401(k) in a divorce

On Behalf of | Sep 18, 2020 | High-asset Divorce |

Previous posts on this blog touched upon the fact that retirement accounts are subject to property division proceedings in Colorado. Yet many people may still wonder how the court chooses to divide a fund such as a 401(k).

However, what this question does not take into account is the fact that the individual parties involved have a great deal of say in the handling of such an account. Both sides should study the options available to them and employ whatever strategy they believe will serve them best over the long term.

Fighting for the full 401(k)

One strategy may be for one to attempt to keep their full 401(k). According to the 401(k) Help Center, this is only possible, however, if one is able to convince their ex-spouse to relinquish their claim to their portion of the account’s contributions. That will likely require that they (in turn) give up their stake in another marital asset of comparable value.

In this context, “comparable value” may end up being much more than one anticipates. The court values the 401(k) assets subject to such a request at their potential future value (after having grown over years through investment earnings and interest). Thus, the amount one has to forego now to benefit from their full 401(k) in the future may be significant.

Cashing out a 401(k) in a divorce

Another potential strategy to consider is cashing out a 401(k). Doing this before reaching the age of retirement would typically result in an early withdrawal penalty (which can be as much as 10% of the total disbursement amount). However, per, divorce is one of the few scenarios where one can take such a disbursement free of any penalty (one still must pay income tax on the disbursement).

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