- About 401(k) loans
- Pros and cons of 401(k) loans
- Comparison: credit card debt
- Ways to cut divorce costs
- Bottom line (TL;DR)
Divorce often comes with unexpected expenses—from legal fees to new housing costs. Figuring out how to cover these costs without putting yourself in financial jeopardy can be challenging. If you’re exploring options, you may have wondered: is a loan from my 401(k) a smart move?
Borrowing from a 401(k) is one way to get cash quickly, but it’s essential to weigh the pros and cons and know how it might impact your future. In this post, we’ll walk through everything you need to consider about using a 401(k) loan for divorce.
What is a 401(k) loan, and how does it work?
A 401(k) loan lets you borrow from your retirement savings, generally up to 50% of your balance or $50,000, whichever is less. You repay this loan, with interest, back into your 401(k) account. Unlike other types of loans, there’s no credit check, and the interest you pay goes back to your retirement, not a bank.
Most importantly, in most states, you don’t need a court order to take a 401(k) loan for divorce expenses. As long as your plan allows it, the decision to borrow is up to you. But before you jump in, let’s look at the pros and cons of this option.
Pros of using a 401(k) loan for divorce costs
- Lower interest rates: A 401(k) loan generally comes with lower interest rates than credit cards or personal loans, and you’re essentially paying yourself back.
- No credit impact: Taking a loan from your 401(k) won’t affect your credit score, which can be beneficial if you need to maintain good credit through the divorce process.
- Immediate access to cash: A 401(k) loan can provide quick access to cash for urgent legal fees and other immediate divorce-related costs.
Cons to consider before borrowing from your 401(k)
- Repayment risk if you leave your job: If you lose or leave your job, you might have to pay back the loan within 60 to 90 days. If you can’t, the outstanding balance is treated as an early withdrawal, subject to income tax and a 10% penalty if you’re under 59½.
- Impact on retirement savings: Borrowing from your 401(k) means missing out on potential investment growth while the funds are withdrawn. Over time, this could impact your retirement savings.
- Added repayment pressure: Although you’re paying yourself back, the steady repayments can strain your budget, especially as you adjust to post-divorce finances.
How does a 401(k) loan compare to credit card debt for divorce expenses?
Credit cards may seem convenient, but their high interest rates (often 15-25%) can make this a costly route. While a 401(k) loan typically offers lower interest and doesn’t affect your credit score, maxing out credit cards could hurt your long-term finances. Here’s a general rule of thumb:
401(k) loan
Consider this if you have job stability, can comfortably make the repayments, and need a lower-interest solution.
Credit card
This could be a short-term option if you plan to pay off the balance within a few months and want to avoid touching retirement funds.
Alternative options for covering divorce costs
Before taking a 401(k) loan or running up credit card debt, here are a few alternatives that might work for you:
- Use Hello Divorce’s limited-scope lawyers and payment plans: Hello Divorce offers a modern approach to legal support. With limited-scope services, you only pay for what you need, making it easier to manage costs. Plus, our payment plans help spread out expenses over time, so you can avoid tapping into retirement savings altogether.
- Explore a personal loan: If you have decent credit, a personal loan may offer manageable interest and won’t impact your retirement.
- Consider a low-interest line of credit: A home equity line of credit (HELOC) or personal line of credit could be a lower-cost alternative, helping you manage expenses without dipping into your 401(k).
- Look into divorce funding services: Some niche services provide funding specifically for divorce costs, repaid over time. This can be a less common but helpful option for some.
The bottom line: weighing your options carefully
A 401(k) loan might be a better choice than running up high-interest credit card debt, but it’s still a big decision that requires careful thought. Consider your job stability, your ability to make repayments, and the potential impact on your retirement. And don’t forget—there are options out there that don’t require touching your retirement savings.
At Hello Divorce, we’re here to help you make the best financial and legal choices for your situation. Our services are designed to be affordable, accessible, and flexible so that you can tackle divorce costs without overwhelming your future plans. Reach out to us if you need advice or want to learn more about how limited-scope legal services and payment plans can make divorce more manageable.
Divorce doesn’t have to jeopardize your financial future. With thoughtful choices and the right support, you can protect what matters most and move forward with confidence.
