Minimizing the impact of 401(k) division during divorce

Past posts on this blog detailed the potential long-term financial impact divorce can have on one’s life (including their retirement plans). Indeed, many people often feel blindsided when they enter into the property division portion of their divorce proceedings and discover that their 401(k) accounts are subject to division (or, more specifically, those contributions made to such a fund during their marriages).

Depending on how close one is to retirement (or how far they are into contributing to their 401(k) account), this may present a significant financial setback. Thus, one may want to research what their options are for dividing (or even retaining) their 401(k) accounts.

Retaining the full 401(k)

Per the 401(k) Help Center, keeping the full amount of a 401(k) in a divorce is an option, yet not without one having to make financial sacrifices of their own. It requires attempting to convince their ex-spouse to relinquish their stake in the contributions made to the account. To do so, however, they typically need to give up their claim to marital asset of equal value. One should remember that “equal value” in this case would be the potential future value of those assets (taking into account the estimated returns from investments and earned interest).

Avoiding tax liabilities

If one’s ex-spouse proves to be unwilling to make such a compromise, one may then want to turn their attention to ensuring that they avoid potential tax liabilities associated with the division of their 401(k). According to the website SmartAsset.com, divorce offers one the chance to cash out their portion of a 401(k) without incurring an early withdrawal penalty. If one’s ex-spouse chooses to do this, then they should ensure that they do not share in the responsibility of paying any income taxes on the disbursement.