I’m going through a divorce — should I tap my 401(k) to buy my spouse out of our home, or take on a HELOC and risk higher monthly payments?

She’s not sure if she should get a home equity line of credit (which will raise her monthly mortgage payments) or if she should tap her 401(k) to do that.

So, what’s Abigail’s best move?

Consider whether keeping the house is worth it

Before Abigail makes any move to buy Emmett out, she needs to take the time to consider whether she’s really making the best decision.

“One of the first things I encourage clients to do during a divorce is to challenge their assumption that they have to keep the family home,” Mary Ware, senior wealth advisor and managing partner of Carnegie Private Wealth, told Moneywise.

“Why do you want to keep it? Is it because it makes sense financially and personally? Or does it feel like something you should do? Sometimes a fresh start in a new home can be healthier emotionally and financially than holding onto the old one,” Ware said.

Ware warned that it’s important for Abigail not to overextend herself just to keep the home, as she’ll now have to cover all of the repairs and unexpected expenses on her own. “Depending on the size of your house, that could cost you $20,000 or more every three years.”

Christopher Walsh, a financial advisor at Capital Choice, also agreed that selling the house is something Abigail should seriously think about. “Selling the house might be the cleanest solution because both spouses could just get cash to go start their new lives,” he said.

However, he also warned that this could come with costs, including the expenses of staging and selling the property. Plus, since mortgage rates have increased considerably in recent years, buying a new home now could be cost-prohibitive. All these factors must be weighed.

Compare the true costs of a HELOC vs. cashing out a 401(k)

While committing to another monthly payment by taking out a home equity line of credit (HELOC) may seem frightening to Abigail, the costs of tapping her 401(k) could be higher than she thinks.

“I would always look at taking money out of my 401(k) as a last resort,” Domenick D’Andrea, co-founder of DanDarah Wealth Management, told Moneywise. “You’ll incur taxes and potentially a 10% penalty. So, if you need, say, $200,000 as the buyout amount, you probably need to take out around $250,000 to cover the taxes and potential penalties.”

Walsh also warned about the huge costs of a withdrawal, pointing out that Abigail will also be switching her tax filing status to single, so a big 401(k) distribution could push her into a higher tax bracket, raising the costs of the withdrawal even more on top of the penalty.

And both D’Andrea and Walsh pointed out that Abigail wouldn’t just take a one-time hit. She’d lose all the potential gains she could have made on the withdrawn funds. That could be millions and, as D’Andrea said, it “could be the difference between retiring at your desired age or having to work a few years more.”