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As people prepare to enter into divorce proceedings in Covington, they likely understand that they will need to make some concessions to their soon-to-be ex-spouses in the area of property division. One element of this particular issue they may not be expecting to deal with is the division of their individual 401k accounts. Many often question why a 401k would be included amongst their marital assets. As contributions to a 401k account are made from one’s income (which is indisputably a marital asset), they are also considered shared.
Once one has accepted that a portion of their 401k is owed to their ex-spouse, the next step is determining how to best divide it. It is common knowledge that early withdrawals from retirement accounts are typically met with large penalties. Per information shared by cnbc.com, however, a divorce presents a special exception to this rule. During property division proceedings, the court will issue a Qualified Domestic Relations Order authorizing that retirement fund assets be paid to an alternate payee. This allows said alternate payee (the non-contributing spouse) to withdraw funds without having to pay a penalty. They will still, however, have to pay income tax on whatever dispersals they choose to take.
If one has an issue with dividing up their 401k with their ex-spouse, there may be a solution that allows them to retain its full value. This solution does, however, come at a cost. The 401k Help Center suggests relinquishing one’s claim to another marital asset whose value is comparable to that of the 401k contributions owed to their ex-spouse. The condition of this compromise would then be that the ex-spouse allows them to keep the entire value of their 401k.