Can I do a hardship withdrawal from my 401k for attorney fees?
If you are finally divorced and you are short of money to pay your attorney fees, you may consider making a hardship withdrawal from your 401(k). Find out if this is allowed.
If you are going through a divorce and you don't have the money to pay attorney fees, one option that may be available to you is a hardship withdrawal from your 401(k). You can make a hardship withdrawal if you have an immediate financial difficulty. Before you tap into your 401(k) to pay attorney fees, you should figure out if this expense qualifies for a hardship withdrawal.
A 401(k) is considered a marital asset, and you are allowed to make a hardship withdrawal before age 59 ½ to pay the attorney fees and other costs related to a divorce. However, early withdrawals from a 401(k) before 59 ½ can trigger taxes and penalties, and you should use this option as a last resort.
What is a hardship withdrawal?
If you have a 401(k), you can stash part of your salary into the account over your working years. The 401(k) contributions and any earnings generated from these contributions are designed to be used in retirement to help you meet your expenses. Generally, you can start taking distributions penalty-free once you reach age 59 ½.
However, if you have an immediate financial need before 59 ½, you are allowed to make a withdrawal from your 401(k) to satisfy the need. This type of withdrawal is known as a hardship withdrawal, and you can only withdraw the amount needed to satisfy the need.
To make a hardship withdrawal, you must prove that you have a financial difficulty that you want to meet. Some 401(k) plans require participants to provide documentation to prove the hardship. If you are not sure what documents are needed, ask your plan administrator what is needed as proof of hardship.
Can you withdraw money from 401(k) for divorce?
If you and your spouse divorced, you will need to split all the marital assets you accumulated during your marriage. Your 401(k) and other forms of retirement income are considered marital property for purposes of divorce, and they will be subject to division.
Usually, once either party files for divorce and the other spouse is served with court papers, the court freezes any marital assets to prevent parties from transferring or selling assets during the divorce proceedings. This means that neither party can withdraw or transfer their retirement assets without court approval.
However, if you need to pay attorney fees or other costs related to the divorce case, and you don’t have another source of funds, you may be allowed to withdraw money from your 401(k) and use it to pay attorney fees. However, withdrawals from a 401(k) before 59 ½ can trigger taxes and penalties unless the expense qualifies for an early withdrawal penalty exemption.
Since the 401(k) is considered a marital asset, your spouse will get credit for the amount you withdraw. Each spouse is required to pay their attorney fees, and any withdrawals from either party's 401(k) will be considered when dividing the marital property.
How much can you withdraw?
The IRS limits the amount you can withdraw as a hardship withdrawal to the amount needed to satisfy the financial need. For example, if you need $5,000 to pay your attorney, you can only withdraw up to $5,000. However, the amount you withdraw should include the amount needed to pay taxes and penalties on the withdrawal.
Also, under the new IRS rules, you may be allowed to tap into your salary-deferral contributions, employer contributions, and any investment earnings earned from contributions. Under the old rules, 401(k) participants were only allowed to withdraw their salary-deferral contributions. Also, after making a hardship withdrawal, you can keep contributing to the 401(k) and collecting a 401(k) match from your employer.
Other options for paying attorney fees
Once you make a hardship withdrawal, you won’t be allowed to put back the money into the account. This means that the money withdrawn misses the opportunity to grow through compounding.
An alternative to a hardship withdrawal is to take a 401(k) loan. Unlike a hardship withdrawal, you will be able to pay off the loan plus interest back to your 401(k) account. Usually, you are allowed up to five years to pay off the loan, but the repayment period can be longer if you are using the 401(k) money to buy a home. You can borrow a maximum of $50,000, or half of your vested 401(k) balance.
However, if you default on the loan payments, the unpaid loan will be considered to be a withdrawal, and you will owe taxes and an early withdrawal penalty if you are below 59 ½.