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Archives for April 2019

Roth IRA in Divorce

April 22, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

Managing your ROTH IRA in divorce can be a struggle. Divorce itself is an emotionally charged, troubling process. Add major financial decisions to the mix and divorce can be a recipe for disaster. Litigants are forced to make life-altering financial decisions during a time of emotional turmoil. Anyone walking through divorce knows this can feel like an insurmountable task. There is hope! You can do this!

Our next few articles will focus on different types of assets we see divided on a regular basis in divorce. We will discuss the different types of financial accounts, their tax benefits or consequences and their pros and cons.

employer contributions

The ROTH IRA is a powerful financial tool which differs in many ways from a Traditional IRA or a Rollover IRA. The ROTH IRA can be used for a variety of needs sometimes without taxation or penalties. If you have a ROTH IRA to divide in your divorce you have potential access to a powerful financial tool.

Withdrawals of Contributions

In general, withdrawals of ROTH IRA contributions, or the tax basis, can be taken anytime, tax- and penalty-free. You can specifically request the ROTH IRA contributions be distributed and ask the fund company to leave the earnings alone.

It is important to know what portion of the ROTH IRA value is from contributions (or the cost basis) and what part of the ROTH IRA is attributable to earnings. Ask your attorney to request that information in the divorce process if you do not have it. You will need this information for your CPA at tax time if you request a distribution from your ROTH IRA. You will need this information whether you use the ROTH IRA now or years into the future. Make sure you know the cost basis if you receive the ROTH IRA in your divorce.

Withdrawals of Earnings

You may have to pay taxes and penalties on earnings in your Roth IRA. Taxes and penalties on the earnings are dependent not only on an exclusion list but also dependent on how long you have had the ROTH IRA. There is a five-year rule for owning the ROTH IRA regarding distributions of earnings.

The five-year rule for your Roth IRA earnings starts on January 1st of the year you make your first contribution. That is when your clock starts. Because you can make a Roth IRA contribution up to April 15th of the next year, your five years technically would not have to be five calendar years. The clock for earnings could count as having started on January 1st as long as you designated contributions up until April 15th for the previous tax year. For example, if you made a Roth IRA contribution in February 2019 and designated it for the 2018 tax year, you would have to wait only until January 1st, 2023 to complete the five-year rule requirement.

Withdrawals of earnings – age 59 and under:

Withdrawals from a Roth IRA you’ve had less than five years.
If you take a distribution of Roth IRA earnings before you reach age 59½ and before the account is five years old, the earnings may be subject to taxes and penalties. You may be able to avoid penalties (but not taxes) in the following situations:
• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You use the withdrawal to pay for qualified education expenses.
• You’re at least age 59½.
• You become disabled or pass away.
• You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
• The distribution is made in substantially equal periodic payments.

Withdrawals from a Roth IRA you’ve had more than five years.
If you’re under age 59½ and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you meet one of the following conditions:
• You use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
• You’re at least age 59½.
• You become disabled or pass away.
• You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.
• The distribution is made in substantially equal periodic payments.

Withdrawals of earnings – age 59½ to 70:

Withdrawals from a Roth IRA you’ve had less than five years.
If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you’ve had more than five years.
If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

Withdrawals of earnings – age 70½ and over:

Withdrawals from a Roth IRA you’ve had less than five years.
If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.

Withdrawals from a Roth IRA you’ve had more than five years.
If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes. Required minimum distributions are not mandated on ROTH IRA’s like they are Traditional and Rollover IRA’s when you are 70½.

In summation, the ROTH IRA is a varied, flexible tool. It is a powerful tool that can provide tax free income for you at many different stages of life. In addition, if you do not have a lot of non-retirement funds to use for funding your divorce process the ROTH IRA is an option for tax-free and penalty-free distributions (when you use the cost basis).

Contact Divorce Financial Services today for your FREE consultation.

Filed Under: Divorce Finance Tagged With: divorce, finances, IRA

The Downside of DIY Divorce

April 18, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

With the increasing popularity of Pinterest, the concept of “do-it-yourself” or “DIY” projects have become enticing for many. I don’t consider myself to be the least bit crafty but have taken on daunting projects like painting kitchen cabinets (I swear, never again) all in the interest of saying, “Wow – look what I did! And I saved a lot of money!”

When DIY Divorce in Texas is the Only Option

In some cases, however, DIY divorce in Texas is necessary and the only option. Consider for example couples who are going through divorce and simply don’t have the financial means to get professional assistance. They are reliant upon DIY divorce documents and are faced with navigating complicated legal issues reduced to fill-in-the-blank forms. It’s a means to an end, albeit less than ideal.

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Filed Under: Alternative Dispute Resolutions

How Much Divorce Settlement is Enough?

April 18, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

So, what could have been one of the biggest and messiest divorce stories of the decade has come to a rather quick conclusion. Jeff and MacKenzie Bezos have come to an agreement on their divorce settlement. If you need me to bring you up to speed, a $137 Billion Dollars were at stake. And in a Community Property State! The Bezos’, among other things, built the company Amazon during their marriage, acquired a lofty fortune, and Jeff Bezos acquired a lofty title along the way. The world’s richest man.

The World’s Richest Couple
While I personally thought of them as the world’s richest couple, if the divorce had just gone by the definition of the law, they would each have walked away worth about $69 billion in the divorce settlement, therefore splitting the difference and giving the title back to Microsoft owner, Bill Gates

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Filed Under: Dividing Property

Reclaiming Who You Are Post-Divorce

April 15, 2019 By Melissa Provence, CDC, DCC Leave a Comment

traveling alone

It took me a long time to accept that the only thing worse than my fear of my own emptiness, was the emptiness of my bottomed-out relationship with my husband of nearly 12 years. We are good people, and we are good parents, but that doesn’t make two people a good couple. So he moved out of our house and into a condominium by the kid’s school. My post-divorce in Texas was simple: I had one dog, a house, and—most of the time—I had our two children.

A year later, a thrum of panic washes over me when the children’s father comes to pick them up on Thursdays. The divorced-parenting class that I attended focused—as they must—on how to best protect and nurture the children. But there were no classes on how parents should learn to be without children or a family. It took me a vulnerable, soul searching year before I came up with a few guidelines of my own, most of them established after hours of reflection and prayer:

1. Surrender to Forever
Girlfriends coming over to the house—their eyes barely containing the dread of visualizing themselves in the same position—say something along these lines: “It’ll be okay. This isn’t forever.” Which is true in the huge, universal sense of the word; nothing is forever. But my living without my children part of the time is my forever, a daily reality. We will never be a family again. This is an earth-shattering, heart-wrenching realization of post-divorce in Texas. Surrendering to the pain of was more unbearable than I could have anticipated. This isn’t where I want to be after all of the time and effort it took to cultivate a lasting relationship; it’s not what I wished for my children; it’s not at all what I would have chosen for my future. It is, however, reality, even though I didn’t choose it. Until my divorce, I hadn’t realized that my outcome in a situation wasn’t a reflection of my effort.

2. Join a Support Group
I’ve never been fond of cocktail parties, charity events, and obligatory dinners, so I automatically decline any invitations to the same. But with empty evenings stretching ahead of me—the weekends were the worst—I found myself scouring the Facebook events for distractions from the dreaded silence of no-children. I found Divorce Care at my local church. It was a refuge for people who were experiencing the same process that I was. There was an understanding, sympathy, and compassion that my married friends couldn’t show me, because until you’re in this place, it’s very difficult to relate. My experience taught me that like death, there are different phases to this type of grief and being around others that were further along in their divorce was inspiring.

women group

3. Close the Door to Unnecessary Sorrow
For the first six months post-divorce in Texas, my knees caved with sadness every time I got to the stair landing and saw the kids’ bedrooms; smelled their adolescent scents; noticed the trail of towels and books and toys that led from their closets to the bathroom to their desks. It took me that long not to get drawn into a Bermuda Triangle of heartache, panic, and guilt; only to find myself standing with mute regret in their innocent spaces. Eventually, I learned to allow myself the sadness but to shut the children’s bedroom doors on the nights I didn’t have them. Their laundry and chaos could wait until I felt stronger. I accepted that I was going to be messy and human and unstable for a while, but that I didn’t need to create unnecessary pain and anxiety for myself. What I needed was to feel the loneliness, let it wash over me and move forward. This is the fundamental rule in therapy. Dwell in the pain. If you continue to push it away or drown it out, you’ll never move forward. Not dealing with the grief now, would have made me a victim and I refused to let my ex-husband and the choices he made have any more power over me.

4. Be Gentle With Yourself
For the first few months after my ex moved out of the house, I would wake up at 3 a.m. and relive every moment of being left behind. I wanted to find fault in what I’d done. Where had I messed up? What had I done to drive him into the arms of another person? Was I that miserable to be around that he would give up his children seventy percent of the time just to get away from me? I considered myself a smart person and yet I had missed the fact that he was having an affair. After a lot of reflection and prayer, I realized that I may have faults but ultimately he made the choice to destroy our family. Nothing I could have said or done could have stopped it, because I wasn’t the issue. He was. His feelings about himself and who he is, lead to the choices he decided to make. We all have flaws but at the end of the day, we deserve respect, unconditional love, and feeling valued in our relationships.

5. Get to Know the New You
For nearly 12 years, the person I was at home was “Mommy” or “wife.” What I answered to most frequently was “Mom.” Suddenly, post-divorce in Texas, I found myself in a free fall of mostly unlabeled, uncalled-upon silence. There was no one demanding my attention at times. I went from having no spare time to having huge blocks of time alone. I missed being needed.
Then one day, I wondered “who am I right now?” If I could be a mother but also nurture my own identity, who would I be? I had grown up very timid and shy, afraid of stepping out of my comfort zone. I decided my strategy from now on would be the same advice I give my children. It’s ok to be afraid but you also have to be brave. Being brave is moving ahead despite your fears. I would now try things that in the past, I wouldn’t have done. It could be something as simple as experiencing a new cuisine or as thrilling as sky diving. I was no longer held by the boundaries of “wife” and who that meant I was as a person. There was freedom from having to consider how my ex-spouse felt about anything I did or how it made him look to others. I gained confidence in myself because I was calling the shots now. I set an example for my children by taking my most broken self and making her into someone that lived life with exuberance and joy.

6. What Now
I bought a t-shirt shortly post-divorce in Texas. It say’s “Know your worth, then add tax.” There is value in being the person you were created to be. The grieving process is long. I don’t feel emotionally wounded for myself anymore but I experience their trauma daily when I see my kids trying to navigate through the minefield of emotions that they experience. I remind myself that I’m a roll model for my children, especially my daughter. They have seen the devastation that divorce has caused and they have seen me rise from it. You are worth more than the circumstances of your past. You have been broken but You have a choice. We can continue to be stuck in the “what if’s” of life or we can choose to pick ourselves up, dust off and move on with joy to “what now”?

Filed Under: Family & Children

Retirement Accounts in Divorce: Five Common Questions

April 1, 2019 By Denise French, CVA, MAFF, CDFA, CRPC Leave a Comment

QRDO edit

Valuing and dividing retirement accounts is more complex than most divorcing couples expect.  Below are common questions we receive regarding retirement accounts and divorce.

1. Can a retirement account be divided without triggering taxes?

A tax-free division is possible, but each plan or account has different requirements.  While the division of marital property generally is governed by state domestic relations law, any assignments of qualified retirement interests (for example, a 401(k) plan) must also comply with Federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code).

A qualified retirement plan under ERISA will require a Qualified Domestic Relations Order (QDRO or “Quadro”) to divide the investments in the account.  If prepared properly, the QDRO outlines every detail of the split so the plan administrator can complete the transaction accurately.

Other retirement plans, such as many traditional IRAs or Roth IRAs, may not require a QDRO.  Many of these plans require a copy of the divorce decree and custodian specific forms to divide the account.

2. Is a retirement plan more or less valuable when compared to other assets?

Retirement assets are only one part of a family’s total financial picture.  In divorce, unnecessary expenses and taxes can be avoided.  Moreover, liquidity is key to starting a financial life over again.  A Certified Divorce Financial Analyst® or CDFA® can be a enormous asset in the process of seeking the best after tax outcome in divorce matters.

Pension plans typically rate the lowest on the list of assets to obtain because those funds are not liquid today (unless you are at retirement age).  Further, each company offering a pension will have rules surrounding availability of the pension funds to the ex-spouse.  It’s wise to know the rules of each pension plan before you sign any binding documents.

Traditional or Rollover IRA’s typically rank lowest on the scale of available, liquid assets because withdrawals are usually taxed at the owner’s highest marginal tax rate and incur a 10 percent penalty until age 59.5 (although there are exceptions).

ERISA regulated plans (such as 401k’s) are one step above the Traditional IRA regarding assets available for liquidity as you can redeem cash from your ex-spouses 401k plan without paying the 10% penalty, but you still must pay taxes.  There is also a federally mandated 20% withholding on all cash distributions.  For example, if you want $80,000 in cash from your ex-spouses 401k, you’ll need to withdrawal $100,000 as 20% ($20,000 in this example) will automatically be forwarded to the IRS.  Lastly, 401k’s follow QDRO rules and it takes time for the QDROs to finalize.  Expect the QDRO process from beginning to “cash in hand” to last at least 3 months, if not longer.

ROTH IRA’s are the most advantageous retirement asset for liquidity needs during or after divorce.  The principal put into a ROTH IRA can be withdrawal, separately from the growth or earnings, tax and penalty free.  You’ve already paid tax on the principal in a ROTH IRA, you are not taxed on it again nor are you penalized on this portion of the ROTH IRA.  The earnings on the ROTH IRA will likely be subject to taxation and the 10% early withdrawal penalty (before age 59.5).  ROTH IRA’s have other quirky rules regarding a 5 years timeline.  Check with a CDFA on the specific rules surrounding your situation.

Non-retirement assets are generally better to obtain than retirement assets in a divorce.  Brokerage accounts will typically have some amount of principal which is already taxed, and the earnings may be taxed at a lower capital gain rate.

The home sale is proceeds nearly always rank high on the list of desirable assets.  A large share of gain from the sale of a primary residence (after closing costs are paid) is not taxed and, unlike most retirement plans, these proceeds are available to divorcing clients before age 59.5 without penalty.

Cash savings and checking accounts are, obviously, the most liquid.

divorce and your 401k

3. Is a retirement account separate property?

I hear so many people who own retirement accounts declare something along the lines of, “I worked.  I pulled in the money.  The 401k is mine!  I earned it.”  We agree, you have earned it!  However, in the State of Texas if you earned it during the marriage, it is a marital asset.  Typically, any funds brought into the marriage whether those assets went into a bank account, a hard asset or a retirement account are a marital asset subject to division in a divorce.

In contrast, retirement assets earned prior to the marriage are typically considered separate assets in Texas and not subject to division in the divorce.  In addition, the growth on those separate assets during the marriage is considered separate property.  However, any income (defined as dividends and interest, even if reinvested) attributable to the separate assets are considered marital.  Sound confusing?  We agree.  It is and separate versus marital can become a very complex, very quickly.

For an accurate appraisal of what portion of a retirement account is separate versus what portion is marital, a forensic engagement needs to be performed.  If the parties choose to keep things simple, a CDFA professional can assist attorneys by using the coverture fraction.  The coverture fraction can be used to calculate the community share and is defined as the ratio of the married years of earning the benefit and the employed spouse’s total earning period.  This way of performing the separate versus marital calculation is not as exact as a forensic engagement, but it gives the parties a good idea of how each tranche of assets should be characterized.

4. Can you avoid the IRS penalty for early withdrawal in divorce?

When the receiving spouse is awarded a share of a qualified plan like a 401(k), the share is most often moved to an alternate payee account inside the plan.  Under IRS rule 72(t)(2)(C), the alternate payee of a qualified plan can withdraw pursuant to divorce without early withdrawal penalties (10 percent), but ordinary income taxes will still need to be paid.  For a spouse with little or no income in the first year of divorce, this can be a source of liquidity to support his or her lifestyle.

The plan administrator will often withhold 20 percent because the alternate payee will be required to pay marginal taxes on any withdrawal.  The more the spouse withdraws, the higher taxes owed.

The alternate payee can often use a two-step withdrawal process to avoid penalties.  First, withdraw the cash needed and then either (1) leave the remaining proceeds in the alternate payee account or (2) roll over the account to a new IRA.  At the end of the year, the recipient spouse should receive a 1099 from the plan administrator for the withdrawal which indicates the 72(t)(2)(C) exemption.

tax law changes

5. Should you “tax affect” retirement accounts when dividing assets in divorce?

Many attorneys will “tax affect” retirement plans (discounting the account by the recipient’s highest marginal tax rate).  Left unchecked, the spouse receiving more of the retirement accounts may benefit (possibly unfairly) in negotiations from this practice.

In order to properly “tax affect” each plan or account based on economics, the parties would need to know when and how much will be withdrawn, future tax rates for each party, and the rate needed to discount the tax expense back to today’s dollars – even when the recipient is very close to retirement.

By preparing financial projections, a CDFA professional can assess the amount and timing of the recipient’s anticipated withdrawals from retirement accounts.  This is an excellent way to handle retirement accounts and divorce.  By discounting the future tax expense, the analyst can assess whether and how much to “tax affect” or discount the value of retirement assets.

Conclusion

Retirement accounts and divorce are exceptionally complicated.  Properly tax affecting and characterizing your estate is critical in divorce negotiations.  Having the right people on your team is one of the best ways to ensure you are receiving the settlement that’s best for you.

Filed Under: Dividing Property, Divorce Finance

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