Property division proceedings can easily become one of the most contentious aspects of a divorce case in New York. One of the primary reasons is because many come into such proceedings with misconceptions about what to expect, particularly when it comes to more complex marital assets such as retirement accounts. 401k account contributions made during a marriage are indeed subject to property division. Those entitled to them (who are the actual plan holders) may not know exactly what to do with what is owed to them.
When dividing up a 401k account in a divorce, the court issues what is known as a Qualified Domestic Relations Order. What this does is authorize a plan sponsor to make a distribution to an alternate payee (which, in this case, would be the non-contributing spouse). According to the 401k Help Center, the most course of action in this scenario is to have the original 401k split into two accounts, giving the non-contributing spouse complete control of their share of the contributions and the ability to devise their own investment strategy. If the non-contributing wishes, they can also stipulate that they want their portion of the contributions to bee rolled over into an existing retirement savings account.
Another option (one that might be more popular with those close to the age of retirement) would be to simply wait until the plan holder retires and take the distribution then. Lump-sum distributions taken before one reaches retirement age are typically subject to a 10% early withdrawal penalty. However, per information shared by CNBC.com, divorce is one of the few cases where the early withdrawal fee is waived if one wishes to cash out any portion of a 401k. They would, however, still need to pay income tax on the distribution.