Should I liquidate my 401(k) to get back on my feet after divorce?
Divorce puts many a woman in a pretty tough spot financially. It can be hard to get your feet back under you afterwards, and it’s tempting to think of any place where you might be able to skim a little money oft the top in an attempt to reestablish some degree of normalcy.
In virtually every case, there’s a measure of cutting back involved. After all, when you were married, you had a certain level of income, whether it was one or two, supporting all of you in one household. Once you separate, your income is divided and supports two households. I haven’t had a case yet where, immediately upon separation, my client won the lottery — so I’m pretty sure it’s safe to say that somewhere in the neighborhood of 100% of clients find that they’re facing changed financial circumstances. And they aren’t an improvement.
There’s also often an awkward in between period. After separation but before you go to court and have temporary child and/or spousal support, or an award of equitable distribution, entered by a judge, or, alternatively, after separation but before an agreement is reached. There are usually at least a couple months (sometimes longer) while nothing formal is in place. Though I have seen and heard of cases where the parties continue to try to work together to make sure that the wolves are kept from the door in the meantime, in many other cases the higher earning spouse does very little (or nothing!) unless and until there’s an agreement or court order in place compelling him to do so.
So, what can you do? Well, not very much. These things do often take time, and that’s not 100% because he’s a scalawag, to but it nicely. (Though, of course, he could be a complete and total scoundrel, and it could be 10000000% his fault.)
In general, I’d advise you to go ahead and file something, if you’re completely dependent on receiving support as soon as possible — though, of course, that can be challenging, since filing with the court usually involves significantly higher legal expenses up front. Though there are some protections in place, too — specifically, an award of child support dates back to the date that the petition was filed with the court, so you start that clock ticking.
Other people choose to try to negotiate a result (even though that doesn’t start the clock for support purposes). If you (1) can’t come up with the money to pay for the legal fees up front, or (2) you’re afraid of needlessly antagonizing your husband with the legal process, you might try to negotiate an agreement first. In fact, lots of people opt to start here. It can be smart, especially if you’re able to reach an agreement quickly and easily (and, frankly, you’ll know whether you think that’ll be possible better than me). But it also ties your hands in some ways. There’s no time limit when you’re negotiating. There’s also no legal “teeth” we can use to move things along, besides actually filing something with the court.
Any other options?
If you have a 401(k) or other investment account, you might think about cashing it in. You probably already know there are a lot of fees associated with that — on top of having to pay the taxes on the money you put in (since you used pre-tax dollars to fund the account, you have to pay the taxes when you take the money out), you’ll also have to pay an early withdrawal penalty. Normally, that penalty is somewhere in the neighborhood of 10%.
Not only that, but you take away any benefit you have from investing early. That compounding interest is your friend, especially if you want to retire — and especially if your changed financial circumstances will make it unlikely that you’ll be able to resume contributions anytime soon.
In general, I think it’s a bad idea to cash out a 401(k) unless there’s absolutely no other way forward. Before you do anything so drastic, I’d recommend that you talk to a financial adviser about downgrading your home or any other cuts you might be able to make that might help you preserve your retirement assets.
Sheera Herrell in our office is a Certified Financial Planner and an attorney, and she might be a good first stop for you. She can certainly help give you some advice to get you started and to help you figure out a plan to move your case forward successfully.
For more information, or to schedule an appointment with Sheera or any of our other licensed and experienced Virginia divorce and custody attorneys, give our office a call at 757-425-5200.