Should you borrow money from your pension during a divorce?

On Behalf of | Jan 29, 2020 | Divorce |

No matter how hard you try, it’s difficult to be prepared for the real expense of divorce. From the cost of new furniture to legal fees, it can seem like there’s always something else that you have to cover during this process. Now, your spouse has suddenly stopped contributing to the household expenses and you know you’re in for a fight.

You have money in your 401(K) or another pension plan, and your first thought is to access the money now and worry about the consequences later.

Hold up.

Direct withdrawals from your pension plan can have significant financial consequences for you in the near future — and down the line. Before you act, it’s time to weigh your options. Here are some things you need to consider:

The taxes can be significant.

When you contribute to a pension plan, you get a tax break. The Internal Revenue Service has penalties in place that generally discourage people from using that money before retirement. If you’re over 59½, you can avoid additional penalties — but those under that age will owe another 10% on top of the regular federal, state and local taxes.

You may need your spouse’s consent.

Your pension may not be wholly yours until the divorce is over. Once you (or your spouse) files for divorce, automatic stays go into place that prevent either side from dissipating the marital assets unfairly. You shouldn’t make any major changes to the existing state of your finances and assets without a legal consultation.

A loan may be better.

You may also be making a mistake — under any circumstances — by flatly withdrawing the money in your pension. If it’s possible to take a low-interest loan out against your pension, instead, you can avoid a great deal of tax liability. Loans can come with their own set of problems and have to be repaid fairly quickly, however, so you need to discuss your options with a financial adviser.

When you’re faced with the financial challenges of a divorce, it’s important to work closely with your legal team and advisors to make sure that you make the best possible choices.