Finding out your spouse cashed out their 401k during divorce can feel devastating. The idea of losing part of your retirement savings when you're already going through the difficult process of divorce is overwhelming.
But don’t panic. In California, the law has built-in protections that ensure you aren't left empty-handed if your spouse makes a move like this. So, what are your options?
Let’s look into the steps you can take and how the legal system can help you recover what's rightfully yours.
At Holstrom, Block & Parke, APLC, we know how frustrating it can be to deal with financial surprises during a divorce. With decades of experience in family law, we’re ready to help you fight for your rights and protect your financial future.
So, if you’ve just found out your spouse has withdrawn funds from their 401k, let’s walk through what you need to know.
Consequences of Cashing Out a 401(k) in a Community Property State
First, let’s clarify how California law handles asset division in divorce.
California Law
California is a community property state, meaning all assets, including retirement accounts like a 401(k), earned during the marriage belong equally to both spouses.
If your spouse cashed out the 401(k) without your knowledge or before the divorce was finalized, that’s a violation of this principle. It’s a clear attempt to get ahead in the asset division process, which the courts don’t take lightly.
Illegal Disposal of Assets
Withdrawing funds from a 401(k) or other marital assets without consent isn’t just unfair—it’s illegal. In California, this is known as "dissipation of marital assets."
Simply put, your spouse can’t make unilateral decisions about shared money during a divorce without your permission, and the courts are not likely to look kindly on this kind of behavior.
Financial Penalties
If your spouse is under the age of 59½ and withdraws money from a 401(k), they’ll also face a 10% early withdrawal penalty.
Additionally, any amount they take out will be taxed as ordinary income, which means they could end up with less than they expected after taxes are applied. While this doesn’t directly benefit you, it can come into play when it’s time to seek reimbursement.
Court Orders and Reimbursement
Here’s where things get a little brighter. If your spouse cashed out the 401(k) without your permission, the court can order them to reimburse you for your share. This includes covering any losses you’ve experienced because of the taxes or penalties that hit when they cashed out the funds.
So, while it may feel like a setback, the legal system is on your side.
What Are My Options?
With the legal framework in mind, here’s what you should do next.
Immediate Action
The first thing you’ll want to do is take immediate action. Time is critical, and the quicker you respond, the better your chances of recovering the funds.
Contact an Attorney
As soon as you discover that your spouse has withdrawn funds from their 401(k), reach out to an attorney. This isn’t something you should handle on your own. A lawyer can guide you through the legal steps needed to protect your rights.
Consider Legal Separation
If you haven’t already filed for divorce, but suspect your spouse is making financial moves like this, consider filing for legal separation. This can freeze assets and stop further dissipation.
Gather Information
Once you’ve secured legal help, you’ll want to collect all relevant financial documentation to strengthen your case.
Document Everything
Gather every piece of financial information you can. This includes 401(k) statements, bank statements, and any other financial records. You’ll also want to look for credit card bills, pension plan details, or prenuptial agreements that might be relevant.
Consult a Financial Advisor
If the idea of dealing with all these financial details feels overwhelming, consider getting advice from a financial professional. They can help you understand the long-term tax effects of the withdrawal and create a plan to protect the rest of your assets.
Legal Recourse
Once you’ve gathered your information, there are legal avenues available to help you recover your share of the 401(k).
- Freeze the Account: Your attorney can help you get a court order to freeze any remaining retirement accounts, stopping any further withdrawals.
- Secure Your Share: With your lawyer’s help, you can pursue your rightful share of the withdrawn funds, including any penalties or tax losses that occurred.
- Qualified Domestic Relations Order (QDRO): To make sure future retirement funds are divided properly, your attorney will create a QDRO. This legal order ensures that the division of retirement assets follows the law and helps avoid extra tax penalties.
Settlement vs. Litigation
There are generally two routes you can take when dividing assets during a divorce—settling through negotiation or taking the case to court.
While settlements are usually faster and less expensive, going to court might be needed if your spouse isn’t cooperating or is hiding assets. Your attorney will help you decide the best approach for your specific situation.
Prenuptial Agreements
If you and your spouse had a prenuptial agreement in place, the situation surrounding the 401(k) might be a bit different. A prenuptial agreement can help protect certain assets in a divorce, including retirement accounts.
However, it’s essential that this agreement was properly drafted and executed to hold up in court. If you’re unsure whether your prenup covers retirement funds, it’s time to take a closer look.
Hiding Assets
Finally, it’s important to note that hiding assets—whether it’s a 401(k) or anything else—is illegal during a divorce.
If your spouse tried to cash out the account secretly or failed to report it, they could be held in contempt of court, and the consequences are serious.
Get Help Protecting Your 401(k) in a California Divorce
Don’t let your spouse’s financial decisions compromise your future. If you’ve just discovered that your spouse cashed out their 401(k), we’re here to help.
At Holstrom, Block & Parke, APLC, our Certified Family Law Specialists have the experience and knowledge to ensure you get your fair share. Contact us today at 855-426-9111 to schedule a consultation. We’re committed to protecting your interests and securing the best possible outcome for you during this challenging time.