Withdraw from 401k to Refinance due to divorce?

[Sweety_tweety]

I will soon be filing for divorce from DH. We have agreed that I will buy out his portion of the equity of the house. As of last year we had about $100,000 in equity. I will have to refinance and am considering withdrawing from my 401K to pay him his equity portion. I have 20+ years before I can retire.

I have mixed feelings about doing this as I have never touched my 401K, even for a loan. Considering I will be the sole person responsible for the mortgage, I like the idea of reducing the mortgage considerably. I would then increase my contribution to my 401K to start to replenish it.

I have no credit card debt and have an excellent credit rating. I know I should probably go to a financial adviser, but this is all rather recent and have not had a chance to meet with anyone. Any thoughts would be appreciated.

 

[queenb123]

Sounds like a decent plan. Just keep in mind of that you will most likely have a penalty for any withdrawl.

 

[momxx5]

I think divorce may qualify as hardship, thus no penalty but you will have to pay taxes on it.
Good luck.

 

[Lisa loves Pooh]

I would attempt to sell it and divide the proceeds.

There is no guarantee that home value will hold. I have seen people end up foreclosed upon b/c they couldn't afford the home after a buyout.

Additionally, you aren't using 2 incomes to pay for it anymore and that will impact your ability to save for retirement.

I would use your buyout only as a solution if it doesn't sell.

And if kids are involved--they are resilient. As long as you keep your chin up and set a positive example for the change, they will roll with it.

 

[IDoDis]

How will your mortgage be reduced if you buy out your ex's equity? You'll give him 50K, but you'll still have the mortgage. Were you planning to refinance after that? You may not qualify for a re-fi on just your income. You could apply to get your mortgage payment reduced, but that would depend on your income.

Another thing to consider is if you were the breadwinner of the family, your DH could be entitled to part of your 401K years down the road if you are in a community property state. He could fight for it and have it put in the divorce decree. Hopefully you'll have an amicable divorce and it won't come to that.

 

[allyphoe]

Don't take the house. Either sell it, or stick him with it. Take the equity and get yourself the smallest house you can stand to live in. Even if you have kids.

Every woman I've known who took the house in the divorce ended up house-poor. Your family couldn't afford a twice-as-expensive house while you were married, right? So why volunteer to take on an equivalent burden when you don't even have a second earner to fall back on in case of crisis?

Even if you have to keep the house, don't cash out your 401(k). You're going to pay federal taxes (probably at least 15%, maybe 25% or higher), plus 10% penalty tax, plus state tax if you live in a state with income tax. There's no hardship exception to the 401(k) tax penalty. It's easy to put off building it back up again, particularly if taking an in-service distribution makes you ineligible to contribute for a period. Whereas if you have a painfully-big mortgage, it's a reminder every month that you're house-poor, and that you need to sell the house.

 

[Cheshire Figment]

Not a good idea.

The amount you take from the 401(k) will be added to all your other income for the year for tax computation, as well as an additional 10% of the withdrawl as a penalty tax if you are not 59.5 at the timne of the withdrawl. And the "first-time homebuyer" exception does not apply.

 

[finz2left]

Don't take the house. Either sell it, or stick him with it. Take the equity and get yourself the smallest house you can stand to live in. Even if you have kids.

Every woman I've known who took the house in the divorce ended up house-poor. Your family couldn't afford a twice-as-expensive house while you were married, right? So why volunteer to take on an equivalent burden when you don't even have a second earner to fall back on in case of crisis?

Even if you have to keep the house, don't cash out your 401(k). You're going to pay federal taxes (probably at least 15%, maybe 25% or higher), plus 10% penalty tax, plus state tax if you live in a state with income tax. There's no hardship exception to the 401(k) tax penalty. It's easy to put off building it back up again, particularly if taking an in-service distribution makes you ineligible to contribute for a period. Whereas if you have a painfully-big mortgage, it's a reminder every month that you're house-poor, and that you need to sell the house.

I agree 100%. On top of it, you deserve a fresh start in a home that is YOURS. EXs stil tend to treat homes as "still theirs" and take far to many liberties,as well. New home. New boundaries. NEW LIFE.

 

[LuLuO]

don't take the house. Either sell it, or stick him with it. Take the equity and get yourself the smallest house you can stand to live in. Even if you have kids.

Every woman i've known who took the house in the divorce ended up house-poor. Your family couldn't afford a twice-as-expensive house while you were married, right? So why volunteer to take on an equivalent burden when you don't even have a second earner to fall back on in case of crisis?

Even if you have to keep the house, don't cash out your 401(k). You're going to pay federal taxes (probably at least 15%, maybe 25% or higher), plus 10% penalty tax, plus state tax if you live in a state with income tax. There's no hardship exception to the 401(k) tax penalty. It's easy to put off building it back up again, particularly if taking an in-service distribution makes you ineligible to contribute for a period. Whereas if you have a painfully-big mortgage, it's a reminder every month that you're house-poor, and that you need to sell the house.

ita.

 

[IDoDis]

A friend of mine who got divorced a couple of years ago was awarded the house with all of the equity (100K, just like the OP). Her problem was that she was an educational assistant and only made $10K a year. That plus her child support was enough to get by on, but the mortgage was a little more than she could afford.

She applied for and was granted a loan modification through a government stimulus program. Her monthly payment dropped $200 a month, so she was able to stay in the house. Given she had so much equity, it behooved her to stay because she would have ended paying close to the mortgage just to rent an apartment large enough for her and the two kids.

 

[shaylahc1]

I would not do it. The real estate market is horrible right now, houses are decreasing in value. You may not have as much equity in your house as you think, and with declining values of homes everywhere your house may be worth even less next year. I would use the equity in the home as a negotiating term in your divorce (maybe reduce child support or alimony) but IMHO it does not make financial sense to take out a loan against a home that is probably depreciating. You will be stuck paying for years on a home that you may eventually have to sell.

 

[sk8jdgca]

first have your house appraised-like other posted said you may not have that much equity-I don't know if this is feasible from a 401k but is there a way you can start an income stream from it now-In canada we have rsp which are similar to your 401k plan. not too many people know that you can start a income stream at any age-it swould help with your mortgage payments and spread out over several years lessen the tax implications-good luck!

another is can you not do a spousal roll over from your 401k plan- so you give him a portion of your 401k plan instead of the equity in the house??

 

[Beckypooh1972]

Your spouse is legally entitled to half of what you accumulated in your 401k during the marriage. One of the reasons some people file for separation as soon as divorce is on the horizon is that separation "stops the clock" on your investments to reduce the amount you might pay out in a divorce. Anything you save after the legal separation is exempt from the "half" your spouse is entitled to in the divorce.

I don't think it's a bad idea to use your 401k to get the house... just keep in mind that you'd have to pay for it out of your half. Other things I'd consider...

do you want to live in a house with so many memories?

do you want to be solely responsible for the upkeep of the home?

will you still be able to afford this home if you lose child support assistance when your kids are grown? (This happened to my sister - she couldn't afford her home once she lost that supplemental income)

is your salary going to rise to meet your financial obligations to this house?

if you plan to remarry, would you be better off not being attached to a home you may have to sell?

Best of luck to you!

 

[Sweety_tweety]

At this point my husband is not contesting the divorce. He said he only wants what he came into this marriage with. He said he is not going to pursue my 401k--I know that can change quickly.

I really do want the house--the location is perfect for me. We have no kids. It is in between my work and school. I looked at some townhouses, but they would be higher than my current mortgage. I guess I have a lot of decisions to make. Thanks for the advice.

 

[seashoreCM]

Did someone say that your and your DH's equity may not be the full $100,000. as of today?

You need to add up the 401k penalties and refi closing costs etc. to figure out the true cost of cashing out DH and also keeping the house.

Other alternatives to explore with the help of an attorney who knows real estate:

1. Put the house on the market. [If it doesn't seem to bring anywhere near oyour asking price so as to yield the $100k equity you might consider being the buyer (The buyer is you individually and the seller(s) are you togehter with DH jointly) Then the reduced purchase price means a smaller amount left over after paying off the old mortgage loan and his portion is smaller than $50k. Furthermore an actual sale is better than an appraisal to figure out what your equity is/was.

2. See if DH will accept montly payments for his share of the equity as opposed to a lump sum now. This avoids the need to take money from your 401k. If you do it this way the sweetener to him is that this is a loan amount with his full share ($50k) as the balance regardless of what the house does in value. Psst! If he balks you could agree to give him additional equity if, when the house is sold, the value has appreciated more.

Your divorce agreement should have an escape clause whereby if you are unable to get financing to your liking then you can change the plans and sell the house and divvy up the proceeds that way. Specifically the divorce agreement should not let DH force you into a usurious or a subprime loan.

 

[Jewel1310]

If you love your house then I think your plan is workable. I think you will owe taxes and penalty on your 401k.
When my ex and I decided on a divorce we drew up our property division and submitted it with the divorce. We worked it out ourselves and while there were a few stressful points we didn't have escalated issues. He was moving out of state so it was an easy decision to let me keep the house (very little equity) and he kept other larger assets to compensate. I had a clause in the divorce decree that if I could not obtain financing by a certain date the house would be sold and proceeds divided (minus the value of the assets he was taking). I was happy to keep the house because I had a daughter in high school. She wanted to be near her friends and I didn't want to further disrupt her life. Now a year and a half later I don't regret the decision. I will most likely sell the house in a few years as it is too big for just me but I am thrilled that I could do keep it.

Good luck. I hope you can stay amicable. We drew up the divorce settlement first and fairly quickly which is one of the reasons I think it worked for me.