Should I Borrow From My 401(k) To Pay For Adoption/Fertility?


“You’ll need $17,500 for the full IVF cycle.” I remember the doctor saying this as we sat in his office discussing our options. We struggled with male infertility, which according to our doctor wasn’t uncommon. 1 in 8 couples struggle with infertility and 50% of them are male infertility. I don’t know if that brought comfort to my husband to know that he wasn’t alone. Needless to say, It was what it was. Now the issue was, how in the world were we going to get $17,500 to go through fertility? The amount loomed large in front of me as I stared at the page.

I couldn’t stop thinking about it as we drove home. A feeling of desperation took over me. I was 35 years old. I wanted a family. I wanted a baby that looked like me, one that snuggled with me, someone to call me Mommy. All my dreams seemed to be inconceivable because of the amount of money we would need to come up with to get pregnant.

I thought about it for weeks. $17,500. How in the world were we going to come up with that money?!

As the desperation passed and logic came back to me, I sat down and determined how I was going to come up with that money.

About 4 years ago, I met with a couple to discuss their finances. I could see by the look on their faces that they were concerned. I began to ask them questions about their finances to determine why they had come in to see me. As we looked at their assets, spending plan, debt situation, and retirement planning; I could tell there was something more they wanted to discuss. I pressed them a little more. With reluctance and a little embarrassment she mentioned that they wanted to go through fertility and needed to come up with the money.

I think I shocked them with my response. I joyfully said, “That’s awesome! I went through fertility too; let me tell you what I did.” The next hour I discussed the ins and outs of fertility and how to come up with the money. We discussed grant money, fundraising, side hustles, and freeing up money from their spending plan. They wanted to know if they could borrow money from their largest asset; his 401(k). Here’s what I shared with them.

The average 401(k) balance for ages 30-39 is $38,400. So, it’s no wonder couples look at this as an option.

What to think about when contemplating borrowing from your 401(k) to pay for adoption or fertility:

  1. Opportunity costs
  2. Tax efficiency
  3. Repayment of loan within 60 days of leaving employer

What exactly is Opportunity Costs and why should you care about it?

There are 2 types of Opportunity Costs: Explicit and Implicit.

Explicit means you chose to spend $17,500 on fertility instead of buying a new car, spending it on adoption, or planning for retirement. Explicit opportunity is what you could have done with that money if you had chosen not to do fertility.

Implicit means a loss of potential income and interest.  I recently met with a young man, age 25 that had left his employer and cashed in his $25,000 401(k). He had used the money to live on, pay off debt, and go on a trip. I showed him that his trade-off was what he lost on the future value of that money. My favorite calculator is Zenwealth’s Time Value of Money Calculator. I showed him that his $25,000 could grow at 7% for 40 years and it would have been worth $374,361. I saw the look on his face as it fell to a stunned expression. He was sick to his stomach. He had not thought about the future value of that money when he cashed in his 401(k). He’s not alone. I googled, “How to cash in my 401(k) after I leave my job” and I got 7.4 million hits. That means people want to know how to do it. They don’t understand the Implicit Opportunity Cost that they are losing if they do cash it in.

Implicit costs can also be intangible costs that are not easily accounted for, such as the emotional aspects of being successful at getting pregnant.

Opportunity Costs need to consider our emotions as well. We ended up spending $35,000 on fertility procedures. My money personality is a Saver/Security. I get seriously stressed out when I spend money, so I should feel remorse for spending that much money. Do I regret that? No, absolutely not. Our trade off was that we spent money on something we valued, which was seeking to have a family. If we had never attempted IVF, because of the money issue, could we have felt that we were true to our values?

You don’t want to endanger your future and perform reckless abandonment towards your current financial situation to start a family. That would be foolhardy. However, your emotions need to be considered when deciding if you should borrow from your 401(k). Before you take out that loan, have you considered all other sources to “find” the money? Be sure to SUBSCRIBE to receive future resources on how to fund your adoption and fertility.

Let’s look at the tax efficiency of borrowing from your 401(k) to use the funds towards fertility or adoption.  Loans are repaid with after-tax dollars. In other words, someone in the 25% tax bracket would need to earn $125 to repay $100 of the loan. Not the best use of your money unless you love giving money to Uncle Sam.

If you are unable to repay a 401(k) loan or break the rules of the loan terms (be sure to read the fine print on the loan papers), in addition to reducing your retirement savings, the loan will be treated as taxable income in the year you are unable to pay. A 10% early distribution tax is executed on the taxable income if you are younger than age 59½.

For example, if you leave your employer at age 40 and cannot pay your outstanding loan balance of $25,000, you will have to include $25,000 in your taxable income for the year and pay a $250 early distribution tax. Most people think, oh, I’m going to be with my employer until I retire. The truth is, we don’t know if that employer will downsize and suddenly you are left without a job. You don’t know if your health will change and you need to stop working fulltime. I’ve often thought, “if only I had a crystal ball to see the future.” We don’t have one, so we need to understand the consequences of the decisions that we could make.

I had a client that was on the edge of his tax bracket. When he left his employer, he had to include his loan balance into his income and it tipped him up into the next tax bracket for that year. The difference was thousands of dollars. He still complains about it 4 years later.

Are you aware that the IRS only allows you to withdraw 50% of your vested balance? They also limit a participant’s plan loans to a total of $50,000 or half of the participant’s vested balance, whichever is smaller. Generally, repayments must occur within five years, with interest that the participant pays to himself.

I’ve heard many clients tell me, “well I’m borrowing from myself and the interest rate is cheaper than if I got a personal loan.” True that the interest is cheaper than if you had borrowed from a traditional bank; however, you are forgetting about the Implicit Opportunity Cost that we talked about earlier.

“Indeed, the first 401(k) loan can act as a “gateway” to serial borrowing, according to Fidelity. A large-scale Fidelity analysis of 401(k) investors last year shows that one out of two first-time 401(k) borrowers went on to take additional loans.” –Market Watch

As I think about this statement from Market Watch I realize that there is a correlation between consumer debt and borrowing from a 401(k). I don’t know how you feel about debt, but I abhor debt. I feel that it restricts me from doing what I truly want to do in life. My Scotch-Irish rebellious spirit comes screaming forward when I think about borrowing money. I view debt as a form of slavery. I know that sounds harsh, but when you think about it, it is. You are forced to work to pay off a debt that you owe. A modern day indentured servitude, if you will. I remember learning in history about early American settlers that fled England in hopes of a better life. They would work for 4-7 years to pay off their debt before they were able to taste the American Dream.  Imagine that you are successful with IVF or suddenly are blessed with a baby through adoption, but now you need to pay off the money that you borrowed. You can’t truly enjoy your Forever Family because you must pay off this debt. Your time is not yours when you borrow money.

Set emotion aside for a minute and let’s talk logical numbers. Here’s a fabulous financial calculator that shows you the cost of borrowing from your 401(k).  I really love financial calculators.( You can read about it in my post about the IRS Withholding Calculator and in this video link.) Maybe because I can’t do math in my head or because it just makes my head hurt. So, anytime I find a great calculator, I get a little giddy.

There are more options to “finding” the money for adoption and fertility than borrowing from your 401(k). Be sure to SUBSCRIBE to not miss out on further articles and podcasts to gain ideas on how to financially prepare for adoption and fertility. Before you borrow from your 401(k), determine your Implicit and Explicit Opportunity Costs and decide how expensive it really is to borrow  the money to fulfill your dreams.

Keep your eye open for my podcast with Zeke and Shanda Arter as we discuss the Little Biscuit Adoption Fund that they started after adopting their little boy. It will be posted in the next 2 weeks.

If you are SUBSCRIBED, you won’t miss it.

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