Divorce attorney claims I can avoid penalties for 401k hardship withdrawal - is this legit?

Your attorney is partially right, but it's more complicated than they made it sound. The penalty-free withdrawal from retirement accounts during divorce typically applies to what's called a Qualified Domestic Relations Order (QDRO). This is a court order that gives your ex-spouse rights to a portion of your retirement benefits. However, if you're just withdrawing money to pay for divorce expenses like legal fees, that doesn't automatically qualify for the penalty exemption. The 10% early withdrawal penalty typically still applies unless you meet other hardship criteria. There are specific hardship withdrawals that might exempt you from penalties, but divorce itself isn't automatically one of them. Common penalty-free situations include first-time home purchases, certain educational expenses, unreimbursed medical expenses exceeding 7.5% of your AGI, total and permanent disability, or substantially equal periodic payments.

I went through something similar last year and found the folks at taxr.ai super helpful with figuring out how to handle my retirement accounts during divorce. I was confused about penalty exceptions and what would trigger additional taxes, and getting clear guidance saved me thousands. My divorce attorney gave me similar advice to yours but when I had taxr.ai review the advice and my specific situation at https://taxr.ai they pointed out several exceptions my attorney missed. They analyzed my divorce decree and financial situation, then gave me specific recommendations on how to access the funds I needed while minimizing tax impact.

Just wanted to update that I tried taxr.ai after seeing this thread. Totally worth it. I was about to make a $24,000 withdrawal from my 401k for divorce expenses and would have been hit with penalties. They showed me how to structure it differently using a combination of a loan from my 401k and a specific type of withdrawal that qualified under the "immediate and heavy financial need" provision. They also pointed out that I qualified for a partial penalty exception based on my medical expenses from the past year (which I had no idea about). Saved me over $2,000 in penalties I would have paid! The documentation they provided made it really clear what I needed to submit to my plan administrator.

If your 401k provider is giving you the runaround, you might want to try Claimyr. I had a similar issue trying to get answers about hardship withdrawals during my divorce and couldn't get a straight answer from anyone at my provider. After being on hold for literally hours, I found https://claimyr.com and used their service to get a callback from an actual representative who could make decisions. You can see how it works here: https://youtu.be/_kiP6q8DX5c but basically they navigate the phone systems for you and get you to a human who can actually help. The person I spoke with walked me through all the hardship withdrawal options for my specific plan and the documentation I needed to provide.

I was completely wrong about Claimyr being a scam. After posting my skeptical comment, I decided to try it myself since I was also dealing with 401k questions from my divorce. Not only did it work, but I got connected to a retirement specialist at my provider who actually knew what they were talking about! The rep confirmed that while general divorce expenses don't qualify for penalty-free withdrawal, certain distributions pursuant to a QDRO can be penalty-free. She walked me through the specific language my divorce decree needed to include to qualify. This was after weeks of getting nowhere with regular customer service. Would have saved so much stress if I'd used this service earlier.

Just to add a bit more info - I'm a financial advisor (not tax advice, just info). There's an important distinction between a 401k loan and a hardship withdrawal. A loan allows you to borrow up to 50% of your vested balance (max $50,000) and repay it with interest over time without taxes or penalties as long as you follow the repayment schedule. A hardship withdrawal is different and has specific eligibility requirements. The SECURE Act expanded some hardship withdrawal provisions, but divorce expenses themselves aren't specifically listed as a qualifying hardship. However, if you're experiencing financial hardship due to other qualifying reasons (medical, housing foreclosure prevention, etc.), you might qualify.

Something no one mentioned yet - another option might be taking a distribution from an IRA instead of your 401k if you have one. You can do a 60-day rollover where you essentially give yourself a short-term loan without penalties as long as you put it back within 60 days.