It is common for people to borrow against their 401(k) to have money for a down payment on a house and for people to take money out of their 401(k) in times of emergency. Since the pandemic started, it is even more common for individuals to withdraw money from their retirement funds due to the increase in job losses and furloughs. In fact, the CARES Act passed in March of 2020, Congress made it easier to withdraw from retirement accounts. So if you lost your job or lost hours/shifts during the pandemic or if you contracted the virus and was unable to work, it is possible that you will qualify for a withdrawal of up to $100,000 in the 2020 tax year. If you qualify, you won’t pay penalty taxes, but the withdrawals will affect your income tax bracket.[1]
If you are in the midst of a divorce or if you plan on filing for divorce soon, taking money from your 401(k) can also have huge consequences for you in the future.
California is a community property state, which means that all assets and debts acquired during the life of the marriage are divided equally upon divorce. Generally, community property is everything that you and your soon-to-be ex own together, as well as all of the earning that either of you earned during the marriage and everything bought during the marriage. This includes any value of your 401(k) that has accumulated during the life of your marriage using contributions made by you while the two of you were still together. So at divorce, that value of your 401(k) will be split and half of it will be awarded to your soon-to-be ex at divorce.
Once the two of you have separated, meaning that one or both of you believe that the marriage is over and there is no chance of reconciliation, any contributions made to your 401(k), as well as any employer matches, are your separate property. Meaning that if you take out that portion of your 401(k), you likely will not be required to reimburse your soon-to-be ex for the amounts you took out of your 401(k). However, if you withdraw funds from your 401(k) that were accumulated through contributions made during the marriage with the earnings from your job, you will be required to reimburse the community for the amount you prematurely withdrew from your 401(k).
Keep in mind though that once the Petition for Dissolution and Summons is served onto your soon-to-be ex, both of you are automatically ordered to restrain yourselves from “transferring, encumbering, hypothecating, concealing, or in any way disposing of, any property, real or personal, whether community, quasi-community, or separate, without the written consent of the other party or an order of the court.”[2]Although, there are two exceptions to these automatic restraining orders. First, if you had regularly taken money out of your 401(k) during the marriage, continuing to do so would be “in the usual course of business” and would be permitted. Second, taking money out of your 401(k) for “the necessities of life” is permitted. While the financial obligations of the community could in some circ*mstances constitute “necessities of life,” such as payment of the mortgage of the house you both lived in during marriage and in which one or both of you currently live, community obligationsdo notipso facto constitute “necessities of life.”[3]
COVID-19 closures and layoffs has caused many people significant anxiety over how they are going to pay for their housing costs and, in some unfortunate circ*mstances, how they are going to pay for food. If you are in such a situation and you do not have money for necessities such as food and housing, taking money from your 401(k) for this purpose will likely be permitted. However, to be safe it is in your best interest to get the consent of your soon-to-be ex prior to taking funds out of your 401(k). Doing so will prevent your soon-to-be ex from claiming that you violated the automatic restraining orders.
Additionally, since the withdrawals are counted as income, the money you withdraw from your 401(k) can be used in the formula to determine the amounts of spousal support and/or child support you will be required to pay. In sum, taking out money from your 401(k) is a huge decision that should not be made lightly, as it can also affect your ability to retire in the future,[4]so it is in your best interest to discuss this option with an attorney.
By Argyris Mah, LLP | Posted on January 13, 2021
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FAQs
This includes any value of your 401(k) that has accumulated during the life of your marriage using contributions made by you while the two of you were still together. So at divorce, that value of your 401(k) will be split and half of it will be awarded to your soon-to-be ex at divorce.
Can you cash out a 401k during divorce? ›
If the withdrawal happens before the divorce is final, the owner is responsible for the income taxes and penalties unless you negotiate otherwise. If you are cashing out a portion of the 401K for the non-owner spouse, wait until the divorce is final and do it through a QDRO to avoid the 10% penalty.
Am I entitled to my ex-husband's 401k after divorce? ›
Any funds contributed to the 401(k) account during the marriage are marital property and subject to division during the divorce unless there is a valid prenuptial agreement.
Can I take money out of my 401k for a lawyer? ›
A 401(k) is considered a marital asset, and you are allowed to make a hardship withdrawal before age 59 ½ to pay the attorney fees and other costs related to a divorce.
How do I protect my 401k in a divorce in California? ›
You may be able to protect your retirement savings accounts from California's community property law by keeping them classified as separate property (in your name only). If you opened a 401K plan before your marriage, do not commingle it with your spouse.
Can you take a hardship withdrawal for divorce? ›
Yes. Unless you qualify for an exception, you must still pay the 10% additional tax for taking an early distribution from your traditional IRA even if you take it to satisfy a divorce court order (Internal Revenue Code section 72(t)).
Can my wife take my retirement in a divorce? ›
It's important to know that you can ask for a share of your spouse's retirement benefit in your divorce. Even if your divorce decree awards you a share of the retirement benefit, though, you might still not be able to receive it unless you take certain additional steps after your divorce.
Can I get half of my spouse's 401(k)? ›
Dividing 401(k) & Retirement Plans in California
In California Law, marital assets and retirement plans must be divided in half. This state community property rule means that the non-participating spouse shall receive 50% of the retirement plan value accumulated during the marriage.
How long do you have to be married to get half of retirement in Texas? ›
Does it matter how long we were married? Most retirement accounts, such as 401(k)s are divided upon divorce regardless of how long the marriage lasted. However, other types of accounts, such as military retirement and pensions, have different rules regarding what you are entitled to and when.
How long do you have to be married to get half of everything in Ohio? ›
Under equitable distribution, the court will consider several factors when dividing marital property: If you have been married for at least ten years. Both party's assets and liabilities. Both party's incomes and taxes.
For example, some 401(k) plans may allow a hardship distribution to pay for your, your spouse's, your dependents' or your primary plan beneficiary's: medical expenses, funeral expenses, or. tuition and related educational expenses.
Should I cash out my 401k to pay off debt? ›
Eliminating debt can bring immediate financial relief, but dipping into your 401(k) or IRA to do so can jeopardize your future financial security. While the idea of becoming debt-free might be appealing, tapping your 401(k) or IRA is generally a bad idea.
Can someone garnish your 401k? ›
Typically creditors can't seize or garnish the assets in your 401(k), because it is protected by ERISA. There are three main exceptions: with the federal government, for back taxes; with some child support payments; and with the solo 401(k), which is more vulnerable. U.S. Department of Labor.
How can I avoid losing my 401k in a divorce? ›
Avoiding losses
Your divorce lawyers can help with this. You may not have to do anything with your 401(k) funds if you can offer your spouse other marital assets of comparable value, such as a home or car. If they accept this, your retirement savings will be untouched.
Should I cash out my 401k before divorce? ›
Retirement accounts such as 401(k)s or IRAs are often considered marital property and therefore are subject to division in a divorce. Because these plans are tax deferred, there are rules in place to restrict early withdrawal.
Can I get half of my husband's pension in a divorce in California? ›
Unless you and your spouse agree to something different, in California the community property part of a pension/retirement plan must be divided equally. If you and your spouse can agree to something different, you have many more options.
Can you withdraw from a 401K without spousal consent? ›
Exempt profit sharing and 401(k) plans usually don't require spousal consent for distributions, including changes to the form of distribution, in-service distributions, or loans. However, it is important to review the plan documents to make sure this is what your plan says.
Can my spouse take money out of my 401K? ›
Both spouses can unilaterally withdraw money, take loans and make other changes to the accounts at will. However, there are some boundaries around this authority – for example, a spouse cannot unilaterally change the beneficiaries of a 401(k).
Can I stop contributing to my 401K during divorce? ›
Moving or withdrawing funds can appear as though you are hiding or disposing of assets to avoid dividing them with your spouse. In most cases, there is no penalty for temporarily stopping any further funds from going into a 401K plan during the divorce process.
How to divide retirement funds in divorce? ›
Assets in a 401(k) account must be divided under a qualified domestic relations order (QDRO). A QRDO is a legal document commonly used in divorce agreements to divide retirement plan assets. QRDOs can only be used for retirement plans covered by Employee Retirement Income Security Act (ERISA).
