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Dealing with one's 401k in a divorce

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Among the more misunderstood (and potentially contentious) aspects of property division proceedings during a divorce is the dividing up of a 401k. Many 401k account holders in Lincoln may fail to grasp why such funds (which come as a result of their own individual efforts) would be subject to property division. It is important to remember that any income earned during a marriage is considered shared, and as 401k contributions are typically pulled from one's income, they are also deemed to be marital assets. 

This brings up one important point regarding 401k division: only those contributions made to the account during a marriage are shared; any funds that were in the account prior to the account holder's marriage are counted among their separate property. The portion of the contributions owed to the non-contributing spouse can be handled any number of ways. They can choose to roll them over into their own separate retirement account, or they can elect to simply cash out their portion and have it dispersed to them now. Typically, cashing out a 401k before one reaches the age of retirement results in a significant tax penalty (as much as 10 percent of the account's value). Yet according to information shared by CNBC.com, a divorce is one of the few instances where one can draw from a 401k early without accruing a penalty. The court simply needs to stipulate that intent in a Qualified Domestic Relations Order. 

If a 401k account holder wants to keep the value of their account (so that they do not lose any potential interest on the amount forfeited to their ex-spouse), the 401k Help Center proposes a potential solution. One can relinquish their claim to another marital asset of equal value in order to retain their full amount of their 401k. 

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Monzón, Guerra & Associates, Attorneys at Law
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