Why taking money from a 401(k) may not be the best idea

On Behalf of | Jan 30, 2020 | Uncategorized

It isn’t uncommon for Illinois residents and others to turn to their IRAs or 401(k) balances to help pay for costs related to their divorces. However, individuals may be diluting the value of their accounts by accessing them before the age of 59½. This is because the government will assess a 10% early withdrawal fee for doing so. Furthermore, those who take money out of their retirement accounts will need to pay income taxes on the amount withdrawn.

Instead of withdrawing money from a 401(k), it may be possible to borrow money instead. Individuals may be entitled to borrow an amount equivalent to 50% of their current account balance up to $50,000. Loans are typically repaid on a monthly schedule, and interest rates are typically the prime rate plus 1%. A person usually has five years to repay the entire loan balance.

It’s important to note that loan repayments are made with after-tax dollars while pre-tax dollars go toward contributions. This means that loan repayments are treated differently than regular contributions for tax purposes. Furthermore, the entire loan balance would likely be due within 60 days if an individual loses a job or quits. Finally, an individual would see his or her account balance appreciate less quickly as there is less money inside of it.

A divorce may be one of the most expensive events in a person’s life. Those who are ending their marriages may need to pay for their own housing, food and health care costs for the first time. It may also be necessary to pay for an attorney to help craft or review a divorce settlement. However, a lawyer may help a person obtain alimony or other financial resources in a final divorce settlement.


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