PLEASE NOTE: To protect your safety in response to the threats of COVID-19, we are offering our clients the ability to meet with us in person, via telephone or through video conferencing. Please call our office to discuss your options

Is withdrawing your portion of a 401k a good idea?

Your divorce is almost certain to bring with it a good deal of uncertainty. If your ex-spouse was the primary wage earner in your home, then you may be faced with the prospect of needing to find employment or even new housing. You might feel much more secure in confronting these new challenges if you are on a firm financial footing. You may be entitled to alimony, yet a more immediate source of funds could be your portion of the contributions made to your ex-spouse’s 401k. 

Such contributions are classified as marital assets due to the fact that they are made from marital income. You may have heard that if you were to withdraw funds early from a tax-deferred retirement account, you may be forced to pay a hefty penalty. That is true in most cases (indeed, the penalty may be as much as 10 percent of the total withdrawal). According to information shared by CNBC.com, however, divorce is one of the rare instances where no early withdrawal penalty is incurred. 

The decision to withdraw funds from a 401k account early (even as part of property division proceedings) is not one that you should make lightly. The main benefit of leaving those funds alone until you reach the age of retirement is harnassing the income-producing potential they present. If you are still several years away from retirement, that money will almost certainly increase from investment earnings and earned interest. Thus, the decision you must weigh is whether the benefit of having an immediate infusion of money now is worth forfeiting any potential earnings that your portion of your ex-spouse’s 401k contributions could make in your own retirement account over the long term.