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Can you cash out your portion of your 401(k)?

On Behalf of | Jul 20, 2021 | Divorce

While your upcoming divorce in New Jersey no doubt brings with it a certain level of relief (due to the end of your marital tensions), it also introduces a fair amount of uncertainty into your life. This is especially true if you were not the primary income earner in your marital home. Financial uncertainties may abound, such as how you will afford new housing or to pay to return to school or receive vocational training.

Many people may tell you that alimony should provide you with any financial assistance you need. Yet such a reward is not automatic. Another more concrete (yet often overlooked) immediate source of income may come from the portion of your ex-spouse’s 401(k) granted to you through property division.

Cashing out your portion of a 401(k)

The court considers contributions made to your ex-spouse’s 401(k) during your marriage to be marital assets (thus entitling you to an equitable portion of them). Typically cashing out any portion of a 401(k) prior to reaching retirement age results in an early withdrawal penalty (as much as 10% of the total disbursement amount). Yet according to information shared by CNBC.com, divorce is one of the few cases where early disbursements are not penalized.

Weighing the pros and cons

Indeed, this may offer you the immediate infusion of cash you need. However, that is not to say that there are not any consequences that warrant further consideration. First and foremost, you need to know that you will need to pay income tax on disbursement.

Next, you may want to consider what you give up over the long-term by cashing out now. Leaving that money alone allows it to grow further through investment returns and earned interest. Thus, you should your need for money now against the potential income it could offer you in retirement.

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