Tips for using retirement funds in a divorce

On behalf of Stange Law Firm, PC posted in Divorce on Tuesday, January 28, 2020.

People in Missouri may find themselves struggling financially during a divorce. This may be even more likely if one person is shouldering most of the child-related expenses. Some people think that borrowing from a retirement account could offer a short-term solution, but there are a number of drawbacks.

One teacher who did not make enough money to cover expenses for herself and her three children withdrew $100,000 from her 401(k) after her husband stopped putting money into their joint account. However, she ended up with just $50,000 from this withdrawal. In addition to a tax bill of around $40,000, she also had to pay a 10% penalty for an early withdrawal.

A better alternative might have been to get a loan against the 401(k). The highest loan a person can get is either $50,000 or half of a person’s vested account balance, whichever is lowest. In this case, she could have borrowed $50,000 and kept the full amount with favorable repayment terms. In fact, some loans allow the full amount to be paid back quickly, which she could have done when her attorney filed for temporary support. However, there are also disadvantages to borrowing against a retirement account, so it may be best to speak to a financial professional.

People who are in a conflict with a spouse during a divorce about supporting the children or similar issues may assume that it is not possible to negotiate an agreement out of court and that they will have to go to litigation. However, they still may want to consider using alternative dispute resolution (ADR) for divorce. Mediation and similar approaches focus on resolving conflict in an atmosphere of cooperation instead of the adversarial approach of litigation. With ADR, the goal is to reach a solution that both individuals are satisfied with.

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