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Why a loan may be better than a withdrawal from a 401(k)

People in New Mexico who are going through a divorce may struggle financially, and they might want to try to borrow from their retirement account to get quick access to funds. However, this can come with hefty taxes and penalties.

This was the case for one woman who took $100,000 out of her 401(k). She intended to use it for rent and food for herself and her three children since her husband stopped putting money into their joint account. As a teacher, she did not make enough money to support her children on her salary. However, she had to pay around $40,000 in taxes and an additional 10% penalty for making a withdrawal before reaching the age of 59 1/2, leaving her with half of what she expected.

A better option might have been to take out a loan against the 401(k). She could have taken as much as $50,000 with good repayment terms. She might have also had the opportunity to repay it all at once when her attorney filed for temporary support from her husband. However, there are disadvantages to a loan from a 401(k). For example, if she lost her job, she would have to repay it in a short time, usually 60 days.

In a situation like this one, in which one parent is withholding support for children, it may be less likely that the couple can successfully negotiate a divorce agreement out of court. If parents do go to litigation, a judge will make a decision that is in the best interests of the child. This might include taking into account whom the child spends the most time with, the child's needs and the relationship the child has with each parent. Even if the parents have joint custody, parenting time might not be equally split.

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