It's common to hear about parents breaking the bank to pay for a child's dream wedding; comedic movies and TV shows have even been built around this premise. But nobody makes a show about parents who go broke paying for their child's divorce, because it's not funny. Unfortunately, it's all too common.
You may be thinking to yourself right now, "I'd never do that! If my child gets divorced, they'll have to figure things out themselves." But when that hypothetical turns into a reality, a number of things come into play. Especially if your child's spouse initiated the divorce, the old familiar impulse to protect your child may surge. There may be a concern that the spouse has an aggressive attorney who will take your child for everything he or she has, leaving them even worse off financially. If you have grandchildren, you want to protect them as well, making sure your child has a favorable custody arrangement.
It's easy to make the mental leap that equates the most expensive attorney with the best attorney for your child. If your child can't afford that most expensive attorney, you may be tempted to make a "temporary loan" so that they can. After all, it's an investment in your child's future, right? But if you're taking money from your own retirement savings to help your child, it can backfire on both of you. Here's how.
As you're no doubt aware, there can be significant penalties for early distributions from a traditional IRA, Roth IRA, or 401(k). The government incentivizes retirement savings, and also punishes use of those funds for purposes other than retirement (with limited exceptions that don't apply here). You can expect to be assessed an extra 10% tax on early distributions (those before you've reached age 59 1/2). This additional tax is on that portion of the distribution the IRS requires you to include in gross income, and it's on top of the regular income tax you would have to pay on that amount of income.
In addition, while that money is out of your IRA or 401(k) and in the pocket of a divorce attorney, it's not earning you any income or interest, as it would be in your retirement account. Even if your child pays you back in full with the amount of the additional tax included, you would still have lost this income. And spoiler alert—there's a pretty good chance your child won't pay you back. Even if they intend to, they may find themselves struggling financially for a while after divorce, and chances are that you won't want to make their lives harder by demanding your money back.
We've seen situations in which older parents are assuming tremendous debt and expense to help their child get the best possible outcome in their divorce, What they may not be aware of is that providing their child with money for attorney fees may cause an unexpected problem for the child.
When your child was young and you took them out for a treat, chances are they picked the biggest, most expensive and lavish thing you'd agree to. Not because they were greedy, but because their wishes were simply disconnected from the reality of the cost. When they were older, got their first job and had to buy things for themselves, their tastes probably got much more modest—because they knew if they bought that expensive pair of shoes or electronic item, they might not be able to make their rent.
Divorce is an emotional time. If your child isn't responsible for the expense, their emotions—anger, grief, envy—might take over, and they may refuse to settle their case when they should, not realizing what pressing forward is costing them (and you). When your child is a stakeholder in their own divorce, they're forced to confront reality. Thus, they're more likely to realize that paying an attorney $2000 to fight over a $500 TV doesn't make sense. The longer a divorce takes, the higher hostilities rise. If your child has children of their own, destroying the possibility of cordiality with their ex through a long court battle will make co-parenting much more difficult. If your child has a financial stake in their divorce, they will be more likely to reach a reasonable settlement sooner, preserving both assets and relationships.
None of this is to say that you shouldn't support your child when they're going through a divorce. But the support you provide should be primarily emotional, letting your child know that you believe in them and that you'll always be there for them—just as you always have. To the extent you do provide any financial support, make sure you can afford it. And if you have to draw from your retirement savings to help your child, be assured: you can't.
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