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Disadvantages of using a 401(k) during divorce

| Feb 4, 2020 | Uncategorized

Divorce can be costly, and some people in Washington may be tempted to turn to their 401(k)s or IRAs to help pay for expenses. However, people often do this without understanding the financial implications.

This was the case for one woman, a teacher who had been going through a divorce from her husband for a year. She learned that her husband had stopped contributing money to their joint account to cover expenses for their three children when her debit card was denied at a grocery store. The woman took $100,000 out of her 401(k) to pay her and her children’s expenses. Since 401(k) contributions are pre-tax, there are taxes to pay on withdrawals. Her taxes were about $40,000. There was an additional 10% penalty for withdrawing before the age of 59 1/2, leaving her with just $50,000.

A better solution might have been to take out a loan against the 401(k). She could have taken out a full loan for $50,000 with favorable repayment terms. Sometimes, these loans can be paid back in full all at once, which she could have done after her attorney filed for temporary support. However, there are disadvantages to a 401(k) loan as well, so people in this situation may want to talk to a professional.

While a divorce agreement may include provisions for spousal and child support, this may be needed during the divorce as well. Before an individual is in a position in which a loan is necessary, it might be possible to get temporary orders in place. Parents sometimes have temporary child custody orders in place as well before the final decision is made about custody arrangements. While some people can negotiate custody and support outside of court, litigation may be necessary in an acrimonious divorce.

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