If you are in the midst of a divorce, you must be careful of spending assets, including your 401(k). If the divorce is contested, your spouse could accuse you of wasting assets. Additionally, each 401(k) has its own rules for withdrawals. If your 401(k) allows early withdrawals or for you to take a loan against the account, a stipulated withdrawal – a withdrawal that your spouse agrees to – may benefit both parties as you could pay off marital liabilities.
A marital asset is an asset obtained during the marriage. It may also be an asset that was obtained before the marriage if you and your spouse comingled funds to purchase or improve that asset. Generally, a 401(k) is a marital asset because the income that is deposited into the 401(k) is income you earned during the marriage and belongs to you and your spouse.
Check with the 401(k) plan’s administrator to see if you can withdraw funds early without rolling the money over into another account. If the plan allows an early withdrawal, but charges you a fee, you may want to leave the money in the account and keep it as part of equitable distribution – you will have to give your spouse the funds in another account or an asset of equitable value.
If the penalty for withdrawing funds is not high and you and your spouse decide that it’s more beneficial to pay of certain liabilities, such as high-interest credit cards, you may withdraw the funds. Make sure you use the funds to pay off marital debt. If you use the funds for yourself, it is counted in equitable distribution, and you may end up owning your spouse a nice chunk of change.
If your spouse agrees to an early withdrawal from your 401(k) plan, make sure you get the withdrawal amount in writing. Also, outline what the money is going to be used for. If your spouse changes her mind about the agreement to withdraw funds, it could cost you in the finalization of the divorce, even if you used it to pay off marital liabilities. Not only should you document the withdrawal and its purposes, but you should also provide a receipt or a pay-off letter showing which marital assets you paid.
Even if you think you can trust your spouse, you should always keep detailed records of any transactions. You should also get everything in writing, as your spouse could change his mind on a whim and could cause you a ton of money.
If your 401(k) is a non-marital asset and you can prove that no marital funds were used to fund the 401(k), you may be able to keep the entire plan for yourself. If you use a non-marital 401(k) to pay off marital liabilities during your divorce, be sure to document – you may be able to request special equity and recoup an equitable portion of the personal money you spent on marital liabilities.