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Weighing whether to cash out your portion of a 401k

On Behalf of | Jul 15, 2019 | Divorce

Your divorce in Fox Lake will inevitably bring with it many changes. These changes can often place a heavy financial burden on you (even with the prospect of you receiving a property division settlement looming). The need to secure housing, complete job training or go back to school to increase your earning potential may be staring you in squarely in the face. One possible solution may be to use the money you have coming from your ex-spouse’s 401k. Many come to us here at Soffietti, Johnson, Teegen, Argueta, Bawcum & Barone asking if they should consider cashing out those funds immediately. 

Typically, if you withdraw funds from a retirement account early, you are required to pay a tax penalty (which can be up to 10 percent of the withdrawal amount, on top of income taxes). Yet according to information shared by, a divorce is one of the rare instances where a withdrawal can occur without incurring a penalty. That is because the court issues a Qualified Domestic Relations Order that authorizes payment to be made to an alternate payee (you). Thus, you can conceivably take that money now and only have to pay income tax on it. 

However, you should consider the potential drawbacks of doing this now. Cashing out your portion of your ex-spouse’s 401k contributions means that those funds cannot generate any income on their own. You could potentially be missing out on significant earnings through investments and interests that could occur if you were to roll your portion over into your own retirement account. The benefit of having the money now should be weighed against these potential losses. 

You can learn more about managing assets gained through divorce by continuing to explore our site.