Those entering into property division proceedings in Manhattan Beach may be surprised to discover that their 401k’s will inevitably end up on the table. That fact should not come as a dramatic shock, however; 401k contributions come from one’s income, and as any income earned during a marriage is considered marital property, so too would any contributions made from it. 401k account holders should realize, however, that the total value of their accounts may not be subject to division; rather, only those contributions made during their marriages are divided.
Still, there may be a way for them to retain the full value of their 401k accounts. According to the 401k Help Center, one can offer to relinquish their claim over another marital asset of equal or comparable value in exchange for the right to keep their entire 401k. This may be preferable to many given the income generating potential that their retirement accounts offer (and conversely, the impact on that potential that removing a significant portion of its funds may have). If one’s spouse is unwilling to give up their claim to their portion of a 401k’s funds, then the next best option may be to have the court issue a Qualified Domestic Relations Order authorizing their portion of the funds to be released, and then rolling them into a separate retirement account.
Withdrawing the non-contributing spouse’s portion of the funds now may seem like an option of last resort. After all, withdrawing money from a retirement account early typically garners a significant tax penalty. However, CNBC.com shows that divorce is one of the rare cases where one can draw funds from a 401k without a penalty. One still must pay income tax on the disbursement; the contributing spouse should therefore push to have that liability assigned to their ex.