Is cashing out your portion of a 401k a good idea?

| Oct 15, 2019 | Property Division

It almost goes without saying that your divorce in Clinton Township will bring with it a good deal of uncertainty. While it may be relief to no longer be involved in whatever bitterness may have permeated your marriage towards its end, you may now find yourself needing to secure new housing, go back to school or through career training, or in need of many other things whose expenses might be high. Spousal support may assist in handling these costs, but there is no guarantee that it will be awarded in your case. One source of funds that you may want to look to for a quick infusion of cash is your ex-spouse’s 401k.

Contributions made to your ex-spouse’s during your marriage came from their income (which is a marital asset). Thus, those contributions are considered a marital asset as well, and are subject to property division. Yet is cashing out your portion of those funds even an option (that is, without incurring a stiff tax penalty)? According to information shared by CBNC.com, it is (provided the court has issued a Qualified Domestic Relations Order in your case). Divorce is one of those rare scenarios where you can make an early withdrawal from a retirement account without a penalty.

Yet before making the decision to do so, you should first consider the consequences. While you can benefit from these funds immediately (you will still have to pay income tax on them), you lose out on the opportunity to roll the funds over into your own retirement account and put them to work for you. Depending on how far away you are from retirement, the added money earned through interest and investment returns could be significant. Weighing out the pros and cons of each option may help you make the best decision.