Protecting What Matters Most

The pros and cons of liquidating a retirement account

On Behalf of | Jan 31, 2020 | Divorce

There are many expenses that you may need to account for during and after a divorce. For instance, you may need to pay legal fees, get health insurance and pay for your own housing. Regardless of where you live in New York, the cost of living can be much higher as a single person compared to when you were married.

You may be tempted to use your 401(k) to pay bills

It can be tempting to tap into your 401(k) to cover legal fees or other living expenses. In many cases, funds can be transferred from your retirement account to your checking account in a matter of hours. However, you could be hit with an early withdrawal penalty if you’re younger than 59 1/2 when the transfer happens. You will also need to pay income tax on any amount that you take out of your account.

It may be better to borrow the money instead

Most 401(k) plans allow you to borrow up to 50% of the account’s balance up to $50,000. The loan is typically repaid in monthly installments with interest rates starting at 1% above the prime rate. You don’t have to pay income taxes on the amount that you borrow, and your account is replenished each time that you make a payment.

There could be downsides to a 401(k) loan

While a loan may be preferable to withdrawing money from a 401(k), there could be downsides to this option as well. For instance, you could be required to repay the entire loan balance if you quit or otherwise leave your job. Finally, keeping money in your account allows it to grow faster thanks to the concept of compound appreciation.

Individuals who are going through a divorce will likely need to make many decisions that could impact their financial futures. Therefore, it could be a good idea to work with an attorney who might be able to help a person make decisions that are in their best interest.


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