The pros and cons of cashing out retirement assets in a divorce

On Behalf of | Jan 27, 2021 | Family Law And Divorce

Past posts on this blog detailed the financial impact your divorce may have on your life. That potential impact may concern you if you were not the primary income earner in your marital home in Indiana. You may find yourself needing immediate funds to secure vocational training, return to school or even find new housing.

Many people in your same situation come to us here at Smith, Carillo & Reeder thinking that alimony will be the most likely source of funds to meet those needs. Yet family courts do not automatically award alimony in all cases. Instead, if you find yourself in need of immediate financial assistance, your ex-spouse’s 401(k) may be a more reliable source.

Cashing out your portion of a 401(k)

Given that the contributions made to your ex-spouse’s 401(k) during your marriage came from marital income, the court defines them as marital assets. Typically taking an early withdrawal from a 401(k) account results in a tax penalty (which can be as much as 10% of the disbursement amount). However, according to the website, divorce is one of the few situations where early withdrawals are not penalized.

Considering the cost of cashing out

The aforementioned fact may make it seem as though there is no drawback to such an action. Yet there are, and you should consider them before committing to such a decision. By cashing out now, you forego the potential growth those funds may generate if left alone until you retire. If you are still several years from reaching retirement age, that growth may be significant. You should thus weigh that sacrifice against the benefit of having an immediate infusion of funds now.