Can You Use Your 401(k) Funds During Your Divorce?

401(k), Blog

401(k) Divorce in TexasDivorce in Dallas and throughout the country can be expensive – especially if you are anticipating a contested divorce, where you and your spouse will need to have a judge rule on issues such as division of community property and child custody. The more complex your divorce case, the higher the likelihood it will require more time before a judge and more work for your attorney to build your case.

If you are expecting a contested divorce and you own substantial community property that may be complicated to value and distribute, your case likely will take more time and effort, and it may require bringing in an expert – such as an appraiser or a forensic accountant.

If you may be anticipating an expensive divorce, you might be exploring sources of funding for your divorce, as well as for paying for moving expenses – if you are relocating from the home you currently share with your spouse. Can you use your 401(k) funds during your Texas divorce?

Paying a Penalty for Using Your 401(k) Funds

If you want to dip into your 401(k) account to have cash reserves during your divorce, you may be eligible to take funds out of a 401(k) account. You will need to first determine if there are any standing orders prohibiting you from borrowing or liquidating your 401(k), as you  may need court permission to do so.  Next, you will need to determine what amount of your 401(k) is vested. In other words, what portion of the money in your 401(k) account do you own? It is possible your 401(k) account will not be fully vested until a particular date, or for a specific number of years. Then, you may not have access to the money in your 401(k) plan unless you are no longer working for the employer whose matched contributions added to the fund.

As CNN Money explains, “company matching funds usually vest over time — typically either 25 percent or 33 percent a year, or all at once after three (3) or four (4) years.” Then, it is not until you are “fully vested” that “you can take the entire company match with you when you part ways with your job.”

Also, if you take money out of a 401(k) account, you should expect to pay a penalty if you have not yet reached retirement age, in addition to tax on the amount you take out. Usually, the penalty for early withdrawals from a 401(k) is 10 percent. For example, if you take out $25,000, you will pay a penalty of 10 percent or $2,500.

Using a QDRO 

Using money from your 401(k) during your divorce for legal expenses or other costs like moving is different from transferring money from your 401(k) to your spouse as part of a property settlement or community property distribution. In the latter circumstances, you can use a Qualified Domestic Relations Order (QDRO) to transfer those funds to your spouse without paying the penalty, and your spouse will be responsible for the tax. If the funds get transferred directly into your spouse’s 401(k) account, no tax will need to be paid immediately. Also, in many states, including Texas, 401(k) funds can be regarded as assets exempt from a debt, so you will need to carefully consider whether you want to use 401(k) funds at all.

Contact a Dallas Divorce Lawyer for More Information 

If you have questions about using retirement funds during your divorce, you should seek advice from a Dallas divorce attorney. Contact Orsinger, Nelson, Downing & Anderson, LLP today for more information.