Can I Empty My 401k Before Divorce?

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Can I Empty My 401k Before Divorce

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One of the worries that spouses going through a divorce have is how they are going to share marital assets and the worry that they may lose some treasured assets. 

One of the assets that are subject to division during divorce proceedings is 401(k) money. Although it is funded out of one spouse’s paycheck, a 401(k) is considered a marital asset that is subject to division between the two spouses, including the non-contributing spouse.

If you are worried about losing your 401(k) money during the divorce proceedings, you may wonder whether it is legal to empty a 401k before divorce. Can you legally cash out a 401(k) before divorce?

Let’s find out what the law says about emptying a 401(k) before divorce, and the options you have. 

Is 401(k) considered a marital asset?

Any assets that you own that are classified as community property, including 401(k) money, are subject to division in case of divorce. 

Generally, any contributions made to the 401(k) during the marriage are considered marital assets. During a divorce, each spouse is entitled to claim a share of the other partner’s 401(k) plan. 

However, a court may consider equitable distribution if you have different earnings i.e. if either spouse earns more than the other. In such a case, the court will decide on a fair and equitable way to divide the 401(k). 

Additionally, if you had the 401(k) before the marriage, you can claim it as a separate property. In such a case, any contributions made before the marriage will not be considered marital assets and will, therefore, not be subject to division. However, any contributions made to 401(k) during the marriage will still be considered marital assets, and your spouse will get a share of this portion of retirement savings.

Can I Empty My 401k Before Divorce- Is it Legal?

Although your 401(k) is a community property, you still have control over the plan because it is yours. You can, therefore, withdraw funds from your 401(k) whenever you desire. However, depending on the plan, you may be required to obtain spousal consent for the withdrawal to be approved.

If you are going through a divorce, nothing prevents your spouse from withdrawing money from their 401(k) or even borrowing against their retirement money. However, there are restrictions on the amount they can withdraw or borrow, and therefore, and it is nearly impossible to fully empty the 401(k). 

If you are concerned that your spouse may withdraw or borrow money from 401(k) during a divorce with the intention to disadvantage you, you can contact the plan sponsor to explain the situation and ask them to prevent such withdrawals without notifying you. The plan sponsor may make it mandatory for your spouse to obtain spousal consent if the plan allows it. 

When spousal consent is required, it will be impossible to obtain a 401(k) withdrawal without the spouse’s signature. If the spouse forges your signature on the 401(k) withdrawal form, and you find out, they will have committed a forgery, which is a criminal offense.

What are the rules for taking money out of a 401(k)?

Early withdrawal of funds from a 401(k) is never a good idea. You will be liable to pay income taxes and an additional penalty tax for early withdrawals. 

Here are rules regarding 401(k) withdrawals:

Age requirement

The required age for 401(k) withdrawals is age 59 ½. Once you have attained this age,  you can withdraw your cash from a 401(k) penalty-free. 

However, there is an exemption to this age requirement. If you leave your job at age 55, you will be allowed to make a penalty-free withdrawal. You will still be required to pay income taxes on the money. 

The purpose of the withdrawal

While 401(k) plans may not allow withdrawals before age 59 ½, there may be some exemptions. 

If you are facing a qualified financial hardship such as medical expenses, purchase of a primary residence, or post-secondary college expenses, you may be allowed to withdraw money to satisfy this hardship. However, you won’t be allowed to withdraw more than you need to meet the hardship.

Required minimum distribution (RMD)

Depending on the day you were born, after the age of 72, you must start taking a minimum distribution from your 401(k). If you delay taking these RMDs, you could face a 25% tax penalty on the amount not withdrawn. 

Taxation on the funds you withdraw

401(k) withdrawals are considered taxable distributions and are subject to income taxes. However, if you have a Roth account, you may enjoy tax-free withdrawals if you meet specific requirements for a qualified withdrawal i.e. you must be at least age 59 ½ or older and held the account for at least five years. 

How much can I withdraw from my 401(k)?

There are no restrictions regarding withdrawals of funds from a 401(k). However, the money you withdraw will be liable to taxes and penalty deductions. 

If you have a Roth account, you may be allowed to make tax-free qualified withdrawals; with a traditional 401(k), you will pay taxes on the withdrawals, since this retirement plan is funded with pre-tax money. 

Whether you want to make monthly withdrawals or a single lump-sum distribution, you should contact the plan administrator to let them know how much you want to withdraw. You will also be required to choose a payment method to receive distributions, which can be direct deposit or check. 

How long does it take to get your 401(k) after divorce?

The duration it takes to receive a disbursement of the funds from a 401(k) depends on several things. 

First, there is the Qualified Domestic Relations Order (QDRO). Your divorce attorney is required to draft your QDRO before you can receive your 401(k). A QDRO authorizes the plan administrator to distribute a portion of the participant’s 401(k) assets to their former spouse. 

Also, there is the Divorce Settlement Agreement, which needs to be signed and approved by the divorce court. Once it is finalized, you will receive a copy of the division of assets and the timing of the division giving you the timeline of the disbursement. 

If you and your ex-spouse have agreed on the division and there are no issues, the disbursement could take 3-6 months or less. However, if there are disagreements, the disbursement could take longer.

How to legally protect your 401(k) from divorce

There are several ways you can protect your 401(k) from divorce. 

First, you can claim all the contributions before the marriage as personal property. This way, they will not be subject to division during divorce as the marital assets are shared between you and your spouse.

You can also draw up a prenuptial or postnuptial agreement. You can include a statement of purpose and state how assets such as 401(k) and liabilities will be shared in case of a divorce. 

Regular monitoring and documentation of assets is another sure way to keep your 401(k) safe from divorce. Maintain thorough and accurate records of your 401(k) contributions, statements, and account balances throughout your marriage. During a divorce, documentation provides proof to enable you to separate your contributions to the 401(k) and claim it as separate property.

Lastly, you could consider a transmutational agreement. The agreement allows you to change the character of your 401(k) from community property to separate property.

Final thoughts

While most spouses seek to gain an upper hand during divorce proceedings, you should avoid taking any actions that could create mistrust with your soon-to-be ex-spouse. 

Actions such as withdrawing money from 401(k) during divorce or forging your spouse’s signature during divorce could complicate the divorce proceedings, and place you at a disadvantage. 

Remember, divorce involves the division of assets and creating a new financial roadmap for yourself. Make sure you consult with your divorce lawyer before making any decision to ensure you are making the right decisions and to protect your interests even during the divorce proceedings.

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