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Can you cash out 401(k) funds during your divorce?

| Oct 9, 2020 | Divorce |

As you approach the conclusion of your divorce proceedings in Texas, you may begin to look the future before you and suddenly feel a certain sense of trepidation (particularly of you were not the primary income earner in your marital home). You might find yourself needing an immediate infusion of funds to help you secure new housing, settle certain liabilities or pay to return to school or complete vocational training. 

You may think spousal support will help you cover these costs, yet there is no guarantee that the court will award such a benefit in your case (and even if it is, it may still not provide you with the immediate relief you need). One avenue that could be available to you that you likely have not yet considered is your ex-spouse’s 401(k). 

Dividing up a 401(k) in a divorce

Since the contributions made to your 401(k) during your marriage come from marital income, the court considers those contributions to be marital assets. As such, they are subject to property division. Typically the court will issue a Qualified Domestic Relations Order that authorizes your ex-spouse’s 401(k) sponsor to make a disbursement to an alternate payee (in this case, you) that is then rolled into a new account. Yet with you needing money right now, you may wonder if cashing out your portion of the contributions is an option. 

401(k) disbursements during a divorce

In most cases an early withdrawal from a 401(k) will net you a penalty. Yet according to the website SmartAsset.com, divorce is one of the few cases where such a penalty does not apply. If your need for immediate funds outweighs the potential benefit of allowing the 401(k) funds due to you to grow over time, cashing out now might be a viable option.