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Should you cash out your portion of a 401(k)?

On Behalf of | Jun 9, 2020 | Divorce

Although the conclusion of your divorce proceedings in Punta Gorda can bring with it a certain sense of relief, it is also often accompanied by uncertainty. This is especially true if you were not the primary income-earner in your marital home. While financial assistance in the form of child and spousal support may help ease the transition into your post-divorce life, you may find yourself in an immediate need of funds in order to secure housing, go back to school or pay for vocational training.

You may view your ex-spouse’s 401(k) as a potential source of financial relief (as whatever contributions made to it during your marriage qualify as marital assets). What, then, might the pros and cons be of cashing out your portion of it?

Avoiding an early withdrawal penalty

Some might tell you that is not even an option given that ear;y withdrawals from a tax-deferred retirement savings account typically net an early withdrawal penalty. However, according to CNBC.com, divorce is one of the few scenarios in which permit an early withdrawal without incurring a penalty.

Knowing this, you might believe there to be no drawbacks to this option. Yet there are sacrifices that you make if you choose to take advantage of it.

Consequences of cashing out

First off, while you do not have to pay an early withdrawal penalty, you will pay income taxes on the disbursement. Depending on how much you receive, there may be further tax implications, as well.

Then there is the potential growth that you could miss out on. Leaving retirement funds alone allows them to grow through earned interests and investment gains. If you cash them out now, you walk away from that money. Depending on how far away you are from retirement, that could be a great deal that you forego.

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