A 401(k) account contains investments made by you and your employer into an account created under your name. Under federal tax laws, you can borrow from your 401(k) and if you do so, you alone are listed as the borrower on the loan. However, some 401(k) plans include a "spousal consent" document that your spouse must sign in order for you to borrow from your own retirement plan.
State laws on property rights vary, but generally all of the assets you amass while married are viewed as marital property. Therefore, contributions you or your employer make to your 401(k) plan are jointly owned by you and your spouse, even though the account only contains your name. Additionally, many 401(k) plans include a provision to convert the account holdings into a lifetime income stream for your spouse if you die before the money is depleted.
Your employer and your 401(k) custodian are not under any obligation to include a spousal consent form as part of the loan documentation for a 401(k) loan. However, many companies include the spousal consent form in order to reduce the likelihood of legal complications further down the line. If you take out a 401(k) loan, your employer or plan custodian could have liability issues if a judge awards your spouse half of the 401(k) in a divorce proceeding only to find that the custodian has already allowed you to deplete the funds.
When you take out a 401(k) loan, you must repay the entire loan balance within a time period that you specify. Therefore, even if you become divorced, you should not have an issue if you have an outstanding loan as long as you repay it. However, if you experience a separation of service, you must immediately repay the entire loan balance or accept it as a taxable distribution. If you are under the age of 59-1/2, you must pay a 10 percent tax penalty and ordinary income tax on the whole amount. Doing so reduces the 401(k) balance, including any portion of the account awarded to your spouse during divorce proceedings. To prevent this issue from occurring, many firms include the spousal consent form.
If you are in the process of going through a divorce or anticipate divorce proceedings in the near future, consult an attorney before taking out a 401(k) loan. Your employer might not allow you to take out a loan without spousal consent, but employers that operate in many states often have one rule for loans across the entire company without taking into account property ownership rights in each state. Therefore, even if you can take out the loan without spousal consent, speak to an attorney first to find out if doing so could create legal problems for you.
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