Can you cash out a 401(k) during a divorce?

Texas is a community property state, which means that marital assets are generally split evenly in a divorce. In most cases, a 401(k) balance will be considered a joint asset that must be included in a final divorce settlement. While it may be tempting to take money out of such an account prior to the end of a marriage, it’s typically not in your best interest to do so.

Your spouse could still be entitled to a share of the money

Unless otherwise stated in a prenuptial agreement, your estranged spouse is entitled to half of the funds inside of a 401(k) at the time divorce proceedings began. Documents provided by the plan administrator may be used to verify how much he or she might be entitled to. Those documents may also be used as evidence that unauthorized withdrawals took place and that your spouse never received any of the money. Assuming that such a claim is proven to be true, the judge in your case may order you to provide compensation to this person.

Withdrawals might be subject to penalties and income taxes

If you withdraw funds from a 401(k) prior to the age of 59 1/2, you’ll likely be required to pay a 10% early withdrawal penalty. Furthermore, you’ll likely need to pay federal income taxes on the amount that was taken from the account.

It’s important to note that the early withdrawal penalty is waived if it occurred pursuant to a qualified domestic relations order . Therefore, it may be possible to save thousands of dollars simply by staying patient and waiting until after the divorce is finalized to make use of your retirement funds.