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Dividing 401(k) when it's been borrowed against?

During a divorce when considering what is marital property, many couples look to the funds in retirement accounts as assets. Rightfully so, as the money accumulated in most 401(k)'s can be borrowed against and holds value for its duration. However, when couples jointly borrow against a retirement account and then get a divorce, it is often questioned who owes what. Well, it depends.

As California is a community property state, all assets acquired during a marriage are subject to equal division. Contrary to this model, debts are not necessarily split equally, but equitably. Meaning, the person with the most resources to pay the amount back may be given the brunt of the debt. When considering a retirement account, the amount borrowed from it must be paid back into it, so the person that owns the account is simply paying themselves back. This means the spouse that doesn't own the account may be awarded half of its value but not half of its debt.

Although there are some limitations to what retirement accounts can be borrowed against or even split, generally speaking, all assets except inheritances and gifts are considered for division in a divorce. With that in mind, an individual facing a divorce will likely want to stay informed of changes made to retirement accounts that may impact them.

While it is not uncommon for couples to borrow against their 401(k)'s, doing so may have an impact on the division of property and settlement in a divorce. For more information about what actions can significantly impact your financial outcome, speaking to a skilled divorce attorney may help.

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Victoria S. Linder Law Office
5303 Folsom Boulevard
Sacramento, CA 95819

Phone: 916-905-4805
Fax: 916-498-0127
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