- States divide marital property and debt under the laws of either equitable distribution --- or ED --- or community property, also known as CP. Both types of laws apply the theory that property and debt acquired during the marriage belong not to the parties individually but to the marital union. As such, the name on a 401k isn't important; courts focus on the extent to which the plan was funded by employee and employer contributions during marriage. A 401k can be a mixed asset, consisting of both marital and separate components at the same time. The other side has a claim only against the marital portion.
- Even though your 401k might be 100 percent marital, the plan custodian doesn't really care. If you're the account owner, you enjoy all of the rights that come along with that, which generally include the right to change the beneficiary, borrow from it and cash it out. Marital property rights are an issue between you and your spouse, not between you and the company. Unless there's a restraining order in place, the company lets you cash out whatever the terms of the plan allow.
- Your spouse's attorney may ask the court for a restraining order at the outset of the case. This prevents you from disposing of any marital assets, including your 401k, until the order is lifted. The company that holds your 401k may or may not be aware of this restraining order; however, if you've been served with it, you can't take anything out of the account. Removing funds from your 401k in violation of a restraining order may not only anger the judge --- it can land you in jail.
- Tax-deferred retirement savings plans such as 401k's are attractive not only because employers may match a percentage of your contributions, but also because you don't pay taxes on anything you or your employer put in until withdrawal. Cashing out a 401k in a divorce --- or cashing it out at all, for that matter --- can cause devastating tax consequences in addition to any early-withdrawal penalties. Anything you pull out of the account goes on your taxes as income for that year. As such, you may have been paying taxes on a $50,000 income across the year, but if you cash out a $50,000 401k, you're taxed on $100,000 in income. Your job withholds taxes at the $50,000 rate, and the 401k plan may subtract taxes on the $50,000 withdrawal. Unfortunately, because taxes on $100,000 are higher than $50,000 times two, you're still hit with a tax bill.
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