It is common for people to borrow against their 401(k) to have money for a down payment on a house and for people to take money out of their 401(k) in times of emergency. Since the pandemic started, it is even more common for individuals to withdraw money from their retirement funds due to the increase in job losses and furloughs. In fact, the CARES Act passed in March of 2020, Congress made it easier to withdraw from retirement accounts. So if you lost your job or lost hours/shifts during the pandemic or if you contracted the virus and was unable to work, it is possible that you will qualify for a withdrawal of up to $100,000 in the 2020 tax year. If you qualify, you won’t pay penalty taxes, but the withdrawals will affect your income tax bracket.
If you are in the midst of a divorce or if you plan on filing for divorce soon, taking money from your 401(k) can also have huge consequences for you in the future.
California is a community property state, which means that all assets and debts acquired during the life of the marriage are divided equally upon divorce. Generally, community property is everything that you and your soon-to-be ex own together, as well as all of the earning that either of you earned during the marriage and everything bought during the marriage. This includes any value of your 401(k) that has accumulated during the life of your marriage using contributions made by you while the two of you were still together. So at divorce, that value of your 401(k) will be split and half of it will be awarded to your soon-to-be ex at divorce.