Whether withdrawing money from your 401(k) is a good idea depends on why you want or need the money, but usually it’s a bad idea financially, regardless of whether you plan to file for divorce. If you think divorce is on the horizon, consult an attorney about the best way to handle your finances.
How the Courts View Your 401(k)
Typically, courts view any assets acquired during a marriage as belonging to both parties. This includes your 401(k). Even if you began the 401(k) prior to your marriage, if you continue to add to it during your marriage, that portion of its value is generally considered a marital asset. How much your spouse will receive in a divorce depends on the laws of the state you live in, the length of the marriage and many other factors. But regardless of whether you withdraw money from your 401(k) prior to the divorce, if the money is a marital asset, it will remain a marital asset whether it's in the account or somewhere else.
Barriers to Withdrawal
Withdrawing money from a 401(k) is not as simple as taking money out of a regular savings account. Some funds require spousal consent before you can withdraw money. Some funds simply won’t allow you to withdraw funds from your 401(k) except in the case of a financial hardship, which the Internal Revenue Service defines as an “immediate and heavy financial need,” such as medical bills or impending foreclosure. The law also limits the amount you can withdraw from your 401(k). You may withdraw 50 percent of your vested account balance, up to $50,000. The IRS does allow you to withdraw money from your 401(k) prior to age 59 1/2 if you do so in a series of substantially equal period payments. The rules for computing these payments are dictated under IRS Section 72(t) and once begun, you must continue them for five years or until you reach age 59 1/2, whichever period is longer. Also, you must no longer be employed by the employer managing the 401(k) to take advantage of Section 72(t) provisions.
Unless you’re making withdrawals from your 401(k) for financial hardship or under the Section 72(t) rules, if you withdraw money from your 401(k) before you turn 59 1/2, you will have to pay an additional 10 percent tax on the money you withdraw. This is in addition to the regular income tax you’ll owe on the money you withdraw from a non-Roth account. If you must remove money from your 401(k) after the divorce, however, to satisfy the terms of your divorce decree, you do not have to pay the additional 10 percent penalty.
Withdrawing money from your 401(k) prior to a divorce doesn’t offer financial advantages, since the money you withdraw remains a marital asset that will be considered in your final divorce settlement. If you don’t want to divide your 401(k) with your spouse, you may be able to negotiate a settlement that gives your ex other assets, while you keep the 401(k) intact.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.