This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

Using your 401(k) in divorce or for back child support

People going through a divorce expect to receive a split of the retirement accounts that grew during the marriage.  Lawyers use Qualified Domestic Relations Orders (QDRO’s) to 401(k), 403(b) or other retirement plans.

Yet, certain retirement plans may provide a tool to accomplish goals in a settlement discussions.  Usually, a participant is able to borrow against her own the balance in a 401(k) or 403(b).  Interest is charged and is paid back by the participant over time into her own account. 

A loan from a retirement plan may be possible to:

Find out what's happening in East Greenwichwith free, real-time updates from Patch.

·         Pay down a mortgage to allow one party to accomplish a refinance

·         Pay off credit card debt

Find out what's happening in East Greenwichwith free, real-time updates from Patch.

·         Pay an outstanding arrearage in child support

 

When used in that manner, one must be careful in how the balance of the retirement account is split, for only the participant will be paying the loan back.   In the first two instances above, perhaps the balance after considering the loan should be split.  Perhaps the split should not be equal to offset the loan taken out.   Perhaps the non-participant would take on additional credit card debt to offset the amount of the loan that needs to be repaid to the retirement plan.

If the loan is not repaid, there may be important negative income tax ramifications and your financial advisor can help you determine those effects.  The rate of the loan may be favorable to other sources of funds.  As of August 2013, the average interest rate is about 4.25% (most plans add 1% to the prime rate, though the formula varies across plans).  Personal loans and credit cards average 11.4% and 15.3% respectively. 

Fidelity Investments conducted a study of retirement account serial borrowers.  They found that repeated borrowings can put a serious dent in long-term savings, so this type of loan should not be taken lightly.  In the right situation, it is a good tool to reach a resolution when finances are less than optimal. 

Retirement account loan are more appropriate for reducing more expensive debt, paying down a mortgage so one party can refinance in just his/her name, paying medical bills and paying back due child support  than in paying for vacations and buying luxury items or adult toys.  Sometimes, a retirement account loan is the answer to making a divorce settlement work.  Even after a QDRO splits a retirement account, one may be able to borrow against the balance to use as a down-payment on a new residence. 

 

Source:  One Dip Into a 401(k) Often Leads to Another, by Tara Siegel Bernard, NY Times, August 16, 2013

Call Attorney Steve Hirsch at 352-1000

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?