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Cash payout in divorce vs. waiting for the 401(k) to vest

On Behalf of | Jan 4, 2019 | Divorce

Financial matters are some of the most contentious aspects of divorce. Dividing assets, cash and debts is overwhelming and may make even the most even-tempered person get hot.

One of the hotly contested categories of financial strife during divorce is money held in retirement plans. Unless the parties are already retired or near retirement, this large stash of cash may wind up being a sticking point. When dividing a 401(k) or another such account, you should ask yourself if waiting it out is better or worse.

A lump-sum payout offer

If one party holds the retirement account and makes the contribution, he or she may want to keep that money intact versus splitting it. The other spouse may not have any retirement account or have a very little one and, therefore, will want to get a fair share. When faced with the reality that the account is getting split, the account holder may choose to offer a cash payout to forget the retirement account money.

In this instance, it is best to get professional legal advice. The thought of cash is tempting; however, you may wind up giving up the rights to more in the long run.

The QDRO process

The QDRO process simply splits the proceeds in the account and either withdraws the relevant portion or rolls it into another similar account. The spouse receiving the money will have to pay taxes and penalties if the money gets withdrawn as cash and not rolled over. The account holder only has to pay taxes if the money gets withdrawn for a minor or dependent.

Equitable division

Just because you saved all the money in the account, it does not mean you get to keep it all. Likewise, do not assume you will automatically get anything from a 401(k) as the non-account holder. A judge will weigh the fair and equitable distribution of all assets and debts based on the age of the account, length of marriage and income.

Taking a cash payout instead of going through the trouble of splitting a 401(k) at the time of divorce is tempting. It is imperative you think of the long-term versus short-term benefits.