Options for Dealing with Debt in a Divorce

Options for Dealing with Debt in a Divorce

Whether you have a career or are a stay-at-home mom, debt complicates a divorce. Nobody wants to be responsible for paying a spouse’s debts, and you want to avoid having any joint obligations on your side. There is a way forward if you are aware of your options.

Keeping the Debt

You have a few credit cards that you share with your spouse. When you look into your spouses’ spending, you discover that they have used credit cards for all kinds of things you don’t: gambling, alcohol, and a few hotel visits that have nothing to do with business trips.

This naturally is frustrating, so you don’t want to take care of the bill. They’re the other spouse’s expenses and they should have to take care of it, but they are not. The bills don’t get paid and time is moving forward and because the credit cards are under your name, whose credit is getting ruined? Yours.

You want to take care of any joint debt like this, so your credit report is clean. You will be compensated for it in the settlement by getting more of the cash, house, 401K, investments, or asset. Until that happens, you must protect yourself and keep paying the credit cards.

Excessive Spending

If your spouse is spending thousands of dollars you did not approve, we call that a “waste claim.” These can be difficult to prove and you will need attorneys to help.

In one case, the husband had bought a BMW and an apartment for his girlfriend. We found proof of that spending through receipts that amounted to tens of thousands of dollars. Our waste claim proved that he was stealing from the estate and he had to compensate the estate. With the help of a financial professional and the lawyer, he paid that claim on the estate spreadsheet and the wife was given more in assets as a result.

Digging for Information

If you know your spouse has spent a lot of money, but you do not know exactly how much or where there are ways to find this data. For our clients, we do a lot of digging, starting with the accounts we know about and looking for fishy transactions, such as massage parlors, prostitutes, or rent in New York when you don’t own property in New York. We look for anomalous patterns, flag them and ask for more information. We look at property records, tax records, and all kinds of paper. If the spouse isn’t forthcoming, your attorney can subpoena what we need.

Years ago we had a client with a special need’s child. The husband would not pay for future horseback riding for their child with Down’s Syndrome which had proved to be very helpful for the child in the past. He said they did not have any money. Through five-year-old tax records and pieces of paper that our client had been collecting for month, we discovered two rental homes, a girlfriend, and $200,000 in Certificates of Deposit.

If you think your spouse is stealing or hiding money, collect any kind of information, no matter how old or small, and bring it in for us to look at.

Want to know more about what to do? Please contact Divorce Strategies Group for a complimentary consultation. We’ll talk to you about next steps so you can receive the assets which are rightfully yours!

Ten Financial Pitfalls for Women in Divorce

Ten Financial Pitfalls for Women in Divorce

During divorce, many women are concerned about financial survival—and with good reason. Studies show after divorce, the wife’s standard of living may drop almost 73% while the husbands may increase by as much as 42%.  Many factors combine to lower a women’s standard of living after divorce. Child support may not be adequate to cover the true costs of child rearing, and she might have lost many important years of career growth, making it difficult for her to get back on her feet after divorce.  By familiarizing yourself with the ten financial pitfalls of divorce for women, you can save yourself a lot of heartbreak and hassle in the future.

1. Believing you cannot afford an experienced attorney 

Divorces are expensive.  There is no doubt.  The fees involved for a regular divorce with a qualified attorney are expensive – attorney fees, therapist bills, new living expenses and other advisor fees. Further, the funds previously used to support one household must now stretch to support two. If you are contemplating divorce, now is the time to begin amassing the funds you’ll need to stay afloat.  Think of a divorce as a long term financial cost and plan accordingly before you file or when you first start to believe you spouse may be checking out of the marriage.

If you are not able to save cash for the divorce process, you still have the ability to hire good support for yourself.  You can open a credit card in your name alone, while you are married, and use the marital income to qualify for a card.  That card can be used for divorce related costs and at the end of the divorce, it is placed on the marital inventory as a debt of the marriage.  You have power!! Contact Divorce Strategies Group on this topic and we will walk you through what to do.

2. Bad timing

Divorce is a marathon event which requires careful preparation. Before you act on the divorce, consult with legal and financial professionals, and read about the subject. Also, think about where you are in life. Did you or your spouse just start a business?  Are you or your spouse just about to go back to school for a graduate degree and amass student debt?  Life stages like this may cause you to pause on the divorce or act quickly before major community debt amasses.  If you’ve been married eight years or just hit the nine year mark and your spouse is the major breadwinner, you might want to stick it out a little while longer before you file for divorce.  In order to collect on your ex-spouse’s social security you must be married for at least 10 years from the date of marriage to the actual date of divorce.   Finally, don’t just pack up and drive away in a car  needing major repairs with old clothes on and kids who need braces.  Fix what you need fixed, buy what you want to buy and get your kids situated with what they need before you leave, as much as possible.

3. No records

The three most important words during divorce are: document, document, document. Try to obtain copies of all financial records before your divorce begins. Make a clear copy of all tax returns, loan applications, wills, trusts, financial statements, banking information, brokerage statements, loan documents, credit card statements, deeds to real property, car registration, insurance inventories, and insurance policies. Also, copy records you can use to trace your separate property, such as an inheritance or gifts from your family. The corpus and the capital appreciation of these assets should remain your separate property as long as you can document them. Copies of your spouse’s business records can be a treasure map illustrating where hidden assets, if any, are buried.

4. Overlooking assets

Texas is a community property state. That means every dollar earned during the marriage belongs equally to each spouse. It matters not that the income went into your bank account, a business, a 401k or a second home – those funds belong to each spouse.  Half of everything is yours! Even if you don’t want an asset, it can be used to trade for something you do want. Inventory safe deposit boxes; track down bank and brokerage accounts; keep pay stubs, retirement plans, and insurance policies. Don’t overlook hobbies or side businesses that might have expensive equipment or generate income.

5. Ignoring tax consequences

Tax consequences are one of the most overlooked or forgotten issues in divorce finance. Most financial decisions have tax ramifications.  Should you take the brokerage account or the retirement plan? Should you keep the house or sell it now? Don’t ignore the hidden tax costs of divorce in making these decisions. Your situation may require some calculation by an accountant or divorce financial planner to determine if you are really getting the best deal. And, if there is a chance your past joint tax returns omitted income or overstated deductions, you may want to seek an indemnification clause to protect yourself if the IRS decides to audit.

6. Thinking ignorance is bliss

During divorce ignorance is not bliss, it’s expensive. As painful as it may be, diving in and participating in the process can help you recover more quickly from the divorce because you will have a healthy sense of control over the process, be focused on practical things, and be working with your ex to get things done. Also, taking an active role in the negotiations can help you achieve a better settlement.  You will also likely have less conflict and litigation after the divorce, better compliance from your ex, and better sharing of information about the children. Your attorney will give you valuable legal advice which should weigh heavily into your decision making process, but all of the decisions are ultimately up to you.

7. Mixing money and emotion

This is really tough for women who were hurt during the divorce, however, it is crucial. Try to think of this from an unemotional, business like perspective.  This is likely the largest business transaction you will make in your life – treat it as such.  View your attorney as a paid professional rather than a friend or confidante. When your grief is overwhelming, go to a friend or support group, not to your attorney, who is billing you at his or her normal hourly rate. In addition, revenge is not helpful in long term planning and financial negotiations.  It will not make you happy to declare war on your ex – it will likely just make you broke. Making the effort to bring the divorce to a successful conclusion with as little rancor as possible can help you financially today and in the future.

 8. Not fighting for what’s legitimately yours

Divorce negotiations are not only about survival; they are about molding your long term financial future. It’s important to not let wanting to please others or look like “the good girl” get in the way of taking what is legitimately due you. You have to insist on getting what you legally deserve. Even if you hope you will eventually be able to reconcile with your ex, it is not guaranteed (you are getting divorced after all). Letting him keep all of his 401k because he’s worked so hard could put you in the poor house when you are older while he enjoys a great life.  No matter your feelings, stand up for yourself and get your legal share. If you reconcile, that’s fine. If you don’t, you’ll still be able to take care of yourself financially.  Taking what is rightfully yours (50% at least) is not being greedy, it is protecting your future and honoring your own value as a human being. No matter what your spouse says, you are worth it!

9. Taking the payment overtime versus the lump sum

Receiving a guaranteed, monthly, court ordered income sounds great doesn’t it? Yes, but what if your spouse loses his job? Becomes disabled? Quits his job and moves overseas to work? What if he just stops paying? What if his industry goes through 2 years of consolidation and he is laid off time and time again? What if he starts his own business?  We feel like getting a lump sum is much better than a series of payments – court ordered or not. If he stops paying the court ordered support, guess what you have to do to get him to pay it again? Yes, go back to court.  At some point, those court costs can be more than what you would get from him in the first place.  Take the up-front money instead of the income when given a choice.  You can create your own income stream for that lump sum payment or use it for other financial needs in the future.

10. Not getting good professional advice

Right now, you need all the help you can get! Divorce can be very complicated, so don’t try to do it all yourself. Hire an attorney who can give you excellent advice—even if he or she is expensive. Engage a divorce financial advisor to help you make wise financial decisions and create a roadmap for your future. Find a good therapist to help you emotionally. Don’t skimp now on matters which will affect the rest of your life.

Schedule a 30 minute complimentary consultation today to discuss your specific situation or call us at 281-505-8177 to discuss your concerns.

YOU DON’T GET A DO OVER IN DIVORCE

YOU DON’T GET A DO OVER IN DIVORCE

One of the biggest reality checks for those in divorce is you do not get “do-overs”. Once the estate has been divided, it is divided. Once decisions with minor children have been made, they are made. Sure, you can always spend thousands of dollars to go back to court if you decide you do not like the children’s agreements or want to modify spousal support which was put in place, but that’s just it – you’ll spend thousands of dollars. So now is the time to make sure you are really in the best place you can possibly be for your future.

When you come to terms with this thought, it will hopefully help you see the importance of making the best, most informed decisions you possibly can right now. How many times in life have you longed for a do-over? Don’t make this process something you wish you could have done over. In order to make informed decisions it is important to do all you can to think logically right now.

REACTING EMOTIONALLY

This is one of the BIGGEST MISTAKES made in the divorce process. I know for me; I was completely overwhelmed and exhausted emotionally with the process. I did not know what I was doing, and I felt as though I was going through this in a fog – I just was not myself. I was so stuck in worrying about the future I was not able to take small steps each day to ensure I was on track with the things I had control over.

What this creates is a state of high arousal in the right side of the brain which controls the “fight, flight or freeze” response. We have all heard of this because it’s the basic, instinctual part of the brain protecting us from imminent danger. When we are living in this state of constant arousal, it’s nearly impossible to use the left side of the brain which is our reasoning/decision making part of the brain. We are simply reacting to the events and stimulus without being able to process what is important, so we get angry, afraid, confused and overwhelmed.

What would it be like if you could get help with the emotional part that’s paralyzing you right now? Imagine being able to see the options you might have and the possibilities you never even thought about!

TRY THIS TODAY

Take small steps each day – just one action step to help you feel in control of your divorce process – maybe make a to-do list and check off one small item every day. This can put you back in the left side of the brain where you can begin to think reasonably and clearly.

GET PROFESSIONAL SUPPORT!!

The divorce process requires us to make monumental financial and relational decisions which will impact, realistically, the rest of our lives. It is a wise decision to have professionals help you during this process who are on your side. This help could involve a therapist, divorce coach or group support like Wise Woman’s Guide to Divorce or Divorce Care.

Another area where an advocate can help is with your financials – specifically a Certified Divorce Financial Analyst. If you are younger, the decisions you make today could impact the childhood your children experience including the resources you have to raise them. If you are older, your divorce is a financial negotiation for your retirement years. It is critical to get help with your finances no matter what your situation. That is why we offer complimentary consultations online or the phone for those in divorce to discuss your financial concerns. Contact us today to schedule your time to talk about your concerns and discuss what small steps you can take for financial and emotional peace of mind.

Health Plans – Open Enrollment & Divorce

Health Plans – Open Enrollment & Divorce

If you work for a company which offers health insurance you probably already know about open enrollment.    Updates you choose during this time period will determine your health, dental and vision insurance for the upcoming year and your tax savings in deductible plans like Health Savings Accounts (HSA’s).   While the timing of open enrollment can vary with different employers, open enrollment is generally the period between November and mid-December.  During this time you are able to make changes to your health insurance plans without a major life change.  You can choose to renew your participation in your company’s current insurance plans, switch to a different one, and make changes to participants on your plan for the upcoming year.  Even though it can be tempting to select the plan you had last year so you don’t have to put in much effort, I’d encourage you to pause for a moment and consider if that’s really the best option from a benefits, tax, and budgetary viewpoint.

It Is important to remember if you are still in the midst of divorce, you will likely need to add your current spouse on your health coverage during open enrollment elections for the new year.  If you are under temporary orders (which you likely are) do NOT remove your current spouse from your health coverage right now for the next year.    You can remove your spouse from your health insurance coverage in the new year after your divorce is final as that will count as a major life change.

While you will keep your spouse on your current coverage, it’s important to look at your coverage options and make sure you have the right one for you. After you divorce is final in the new year (or the end of this year), you will remove your spouse from your coverage and this will be your plan for the rest of the year.  Are the deductibles proper for you?  Are you eligible and participating in the HSA? Is this the right plan considering minor children you will have on your plan?  This and other issues are important to consider.

1. Evaluate Life Changes

The amount of coverage you need plays a big role here, especially if you previously covered dependents and/or your spouse and no longer need to or vice versa.  Some other life changes in addition to divorce could make a difference in the plan you choose during open enrollment include births, deaths and medical issues.

2. Review Beneficiaries

Open enrollment time is a good opportunity to revisit the beneficiaries on your accounts.  For example, if you have group life insurance, you may still have your ex-spouse as the beneficiary.  Once the divorce is final you will need to remove your ex-spouse from the beneficiary designation unless you want your ex-spouse to be the beneficiary, and in that case you will need to re-assign that person as the beneficiary after the divorce is final.  Your ex-spouse will be skipped over on a life insurance policy payout unless they are specifically designated in a divorce decree and/or you rename them as beneficiary on the policy after the divorce is final.

We encourage you NOT to list minor children as beneficiaries on an anything.  Minor’s cannot receive payouts without a court appearance and a guardian. Guess who will be the guardian for your children if you pass while they are minors?  It will be your co-parent or ex-spouse unless they predecease you.  If you want to leave the proceeds to your children you will want to create a testamentary trust (included in your will usually and what I have personally) or a revocable or an irrevocable trust.     All of these involve a trip to an estate planning attorneys office which we highly recommend after the divorce is final.

For now, while the divorce is still pending, list your spouse as beneficiary. You are likely under temporary orders to do so. After the divorce is final it’s time to do some estate planning and likely change the beneficiary.

3. Understand the Benefits of the Plans You Select versus Your Needs

This is a great time to make sure you’re getting the coverage you need and you’re maxing out the tax savings from it.   Take the time to review what’s included in your plans, any tax credits or benefits you’re eligible for, and options outside of your employer-provided plans.  That way, you know you’ll actually use everything you’re paying for.  The reality is, it comes down to saving money and being tax-efficient, especially with an HSA.

Another big issue we see with divorcing couples is the deductible and the corresponding out of pocket costs.  You may have a fight on your hands (and undue stress from such a fight for you and your children) if your spouse is living paycheck to paycheck and you opt for a plan with a huge deductible.  Paying hundreds of dollars to meet the deductible for a simple sick visit to the pediatrician may not go well for an ex-spouse on a limited income or at least be an issue to address while you are in divorce proceedings.  Conversely, if there is a large surgery to pay for or a medical issue to be dealt with which is known for the upcoming year, it’s wise to perform a cost analysis on how much it will cost you to have this covered at a higher percent even with a large deductible versus a lower percent of coverage with a lower deductible.

Medical costs can be an enormous part of the annual budget.  The good news is you have coverage and choices, the bad news is sometimes those choices, especially in the midst of a divorce, can be overwhelming.   To make sure you’re getting the biggest benefit, tax savings, and coverage you and your family actually need, talk to a trained consultant who can guide you through the process.

If you’d like me to help you with health care selections during open enrollment season or any other financial related issues, I’ve opened up more Divorce Strategy Sessions on my calendar in late October and early November for those who are not current clients and want some extra help with financial related issues.   In my Divorce Strategy Sessions, we will discuss your needs, your options and your budget so you can make the best choices for you and your future!!  Click here to learn more about Strategy Calls and schedule yours today!

 

Dividing Annuity Assets in Divorce

Dividing Annuity Assets in Divorce

Dividing community property, or property jointly owned by a married couple, can often be a complicated process, with your financial options dictated by potential tax implications. While some things may be easy to divide, others are not. Some belongings are sentimental, while others — such as annuities — involve complicated financial calculations. Annuities not only involve moving ownership from one person to the other or joint title to single title, they often also involve moving or potentially deleting critical living benefits, guarantees and/or death benefits as well as surrender penalties on top of potential tax liabilities. That is a lot! Annuities in divorce are complex to say the least. We will attempt to unravel the complexities of annuities as they relate to divorce or at least guide you on what questions to ask.

Annuity Phase

While there are multiple types of annuities (fixed, fixed index, variable, immediate and deferred) all types of annuities are typically in either the accumulation phase or the distribution phase. The different phases will determine how value and divide the annuity in a divorce situation.

Accumulation Phase

If an annuity is in the accumulation phase, it is growing. The annuity may be growing by a simple fixed rate – aka a fixed annuity or by a variety of factors in the fixed index or variable space. The key take-away is there is only growth in this phase. Income has not yet started. This is a critical factor in divorce negotiations. In the accumulation phase the annuity can have three main parts – the actual cash value, the guaranteed benefit amount and the death benefit.

Cash Value

This is the actual cash value. This is real money and should be the value on the marital inventory. This value may have a surrender charge affiliated with it which should also be reflected on the marital inventory. If you do not see a surrender charge on the statement, it is wise to call the carrier and confirm no surrender fee exists. Also, if the contract is still under surrender charge penalties, ask the carrier if they will waive the surrender charge in the case of a divorce where the account is divided between the spouses. We have found quite often they do not waive any fees even though the division is pursuant to a divorce.

Guaranteed Value or Living Benefit Amount

In the accumulation phase, this is the living benefit amount. Many contracts offer a certain amount of guaranteed growth for future income. For example, some annuities may guarantee 7% growth, compounded annually with possibly even a high-water mark (meaning the annuity will capture the highest day of market gains in the annuity contract that year plus add the 7% guaranteed growth on top of this value). Sound too good to be true? What is the catch? This amount is not real money – it cannot be withdrawal in a lump sum. It is the value for which a future income stream is derived. In our same example, let’s say the contract grows by 7% guaranteed compounded annually, and when the client is age 65 a 5% income stream can be taken, guaranteed for life off the 7% compounded number. (In some cases, the income stream will also double for long term care needs for a certain amount of time.) In divorce, the guaranteed amount is often erased if the annuity is divided. This can cost the overall estate hundreds of thousands of dollars.

Know if there is a living benefit and if so, what happens if the annuity is divided between the spouses? The living benefit number is often quite higher than the actual account value, but this is not the number to be listed on the marital inventory. It is a phantom number used to derive a set amount of income at a future date. However, because there is an account value it is the actual cash value which is listed on the estate spreadsheet. The annuities are designed to deplete the cash value over time when the income begins if you live long enough, so this number is not listed on the inventory when the annuity is still in the accumulation phase.

Death Benefit

Sometimes annuities have stand alone death benefits or death benefits attached to the living benefits. This means a certain amount is guaranteed at the death of the annuitant. In some cases, the death benefit is the reason an annuity is sold as life insurance was not an option or was too expensive. It is important to know if an enhanced death benefit exists and if so, know this and other relevant facts. Who is the annuitant? What is the death benefit exactly? What happens in the case of divorce if the contract is divided or moved to the non-annuitant spouse? Now that the couples are divorcing, is the death benefit still relevant or should other options be considered? The death benefit should be on the latest annuity contract statement. However, it is not listed as an asset on the marital inventory as it will only be pain in the event of the annuitant’s death.

Income Phase

If an annuity is in the income phase, it is in distribution. The distribution may be a systematic withdrawal stream on a guaranteed basis, a systematic withdrawal on a non-guaranteed basis or annuitized. This set of facts is vital to know in the case of a divorce.

Systematic Withdrawal – Guaranteed Basis

This should be the most common situation with an annuity. The income from the living benefit has been triggered. In the example above, the 5% income stream at age 65 has begun off the 7% compounded annual growth the annuity provided. If this is the case, the annuity may not be divisible without significantly hurting the amount of income the annuity provides on a guaranteed basis. Contact the carrier to determine how, if at all, the annuity can be divided, and the income stream kept intact. The income stream however may be divisible. The division of this works much like a pension on the estate spreadsheet where a net present value of the future income stream is calculated, and this is the number on the marital inventory.

You can also forego a net present value calculation of the income on the marital inventory and split the income 50/50. We recommend contacting the annuity carrier to determine if division can occur at the carrier level so there is little, if any, interaction between the parties. You will also want to ask the annuity carrier what happens if the annuitant dies. The wife may not receive any payout if the annuity is based only on the husband’s life and he dies or vice versa. Some payouts are based on joint life and some are on single life which were determined at the income stream’s inception. It is vital to understand what happens in the event of one spouse’s death.

Systematic Withdrawal – Nonguaranteed Basis

If this is the case, you can likely divide this annuity. It may not be attached to a living benefit guarantee. This is the least likely to exists and rarely seen, but it is a possibility. It is important to call the carrier and determine your options if this set of facts exists with your annuity. The issue will be mainly surrender charge penalties when this annuity is divided if it is still in the penalty period. We would also ask if there are any issues with the annuitant – is it joint annuitant or single annuitant and will this be possible if you change to the spouse who wants the asset or if you divide the contract in half.

Annuitized

If this is the case, the annuity cash value no longer exists – it is only an income stream. Older contracts typically have this. Most newer contracts do not require annuitization because the contract corpus is gone – it belongs to the annuity company. The valuation of this is now just like the valuation of a pension plan. The carrier may have the income based on joint life or single life. They may divide the income in half but when one spouse dies, the income stream may cease for all. The carrier must be contacted to determine what happens at the death of the owner and/or the death of the annuitant. These facts are important to know as they relate to the income stream after one spouse dies. If you do not want to divide the income, one can calculate a Net Present Value of the future income stream as one would a pension and this number should be indicated on the marital inventory as an asset to be offset with other assets.

Owners and Annuitants

Aside from the issues we stated above in valuing and dividing annuities in the accumulation and the income phases, the named owner and named annuitant could alter the course of the annuity division. It is vital to know who the owner is and who the annuitant is (they may not be the same). These set of facts may determine what happens to the contract when this is divided to the non-owner and/or non-annuitant. Some contracts are jointly owned the with joint annuitants or jointly owned with single annuitants – and each carrier can handle dividing these differently. A simple call to the carrier and a discussion with a member of client services advanced team should straighten out these issues, we just want you to know what to ask for.

Summary

We highly encourage you to reach out to a professional who not only understands annuities, but also understands divorce laws in your area. A Certified Divorce Financial Analyst is the perfect person to have on your team if you or your spouse own an annuity and you are walking through a divorce. We at Divorce Strategies Group understand annuities and divorce finance and can help as well. Contact us for your 30-minute free consultation today.

Divorce and Retirement Accounts

Divorce and Retirement Accounts

The valuation and division of retirement accounts in divorce is more complex than most divorcing couples expect.  We frequently see people after the fact who wish they had known better before they signed papers to finalize their estate division.  The details are important.  Below are four common items to know about before you sign on the dotted line.

1. Does a retirement account only belong to the person whose name is on the title?

What if only one spouse worked for most of the marriage while the other was the primary caretaker for the home and children?  If that’s the case, most of the retirement assets are likely only in one spouse’s name. Despite the titling, these retirement assets acquired during the marriage belong to the community estate and are fully subject to division in a divorce.  It is common for clients who own retirement accounts to believe they are entitled to the entire account since it’s in their name. However, money earned during the marriage is a marital asset and subject to division in a divorce within a community property state like Texas.

In contrast, retirement assets earned prior to the marriage are typically considered separate assets and not subject to division in the divorce. In addition, the growth on those separate assets during the marriage is considered separate property (but not the income, yes, it gets confusing). For an accurate appraisal of what portion of a retirement account is separate versus and what portion is marital, a separate property accounting must be conducted.  The burden of proof is on the person making the separate property claim.  All assets, no matter what the title says, belong to each spouse equally if the asset was acquired during the marriage, except for those assets which were inherited or gifted during the marriage or came from a personal injury suit.

2. How will we be taxed if we divide a retirement account?

You are not necessarily taxed on the division of a retirement account. Taxation happens only if you distribute the retirement account outside of the retirement vehicle.  For example, if your spouse has a large 401(k) and you divide it during the divorce, no problem.  You can move these funds into an IRA for yourself without paying any tax and let it continue to grow tax deferred. The same rules apply if you are dividing an IRA.  You only acquire a tax liability when you redeem the funds from the retirement chassy and put them into your bank account or a non-retirement brokerage account.

3. Which retirement assets are best to keep in a divorce?

Not all retirement assets are equal as far as the IRS is concerned, which means what you get to keep in your pocket differs – sometimes substantially- between different retirement accounts! This is a synopsis of the different types of retirement assets we commonly see with divorcing couples in our office.  We also provide a discussion of liquidity as having liquid, available cash is king in a divorce.

Pension Plans

Pension plans typically rate lowest on the list of assets to obtain because those funds are not liquid today (unless you are at retirement age). Further, each plan has its own rules surrounding availability of the pension funds to the ex-spouse. Some funds mandate you wait for your ex-spouse to retire while others will let you retire on your own timeline after you have reached a certain age which can be anywhere from 50 to 65.  Pension plans may also offer a lump sum option at retirement – it just depends on the company or entity offering the plan. There is also the issue of company solvency – will this pension plan even exist when you are retirement age?   It is also important to know if you are entitled to assets if your spouse dies before the pension plan begins – some entities don’t pay you at all if your spouse dies before the payout has started, even with a divorce decree.

It is wise to involve a Certified Divorce Financial Analyst or CDFA in cases with a pension as they can help you understand your options and make those phone calls for or with you.  Know the rules of your potential pension plan before you sign any binding documents

Traditional IRAs

IRA’s typically rank lower 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 (barring the exceptions of substantially equal periodic payments for those typically 50 and over, death and disability).   There are no divorce exceptions to the penalty as there are in a 401(k) which is why we prefer our clients are awarded the 401(k) assets rather than the IRA assets if there is a choice.

401(k), Profit Sharing Plans and other ERISA-Regulated Plans

ERISA regulated plans (such as 401k’s and Profit Sharing Plans) 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.  That is a big savings – especially in larger plans.  You can save thousands in fees by just taking the 401(k) over the IRA if you are in need of cash from the retirement assets.

The down side is 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.  You are not losing that money – you’d owe it in taxes anyway you are just forced to pre-pay your taxes.  If you do not owe the full 20% at tax time you will receive a refund or if you owe more, they will certainly let you know when you complete your taxes the following year.  The other negative is 401(k)’s can only be awarded via a Qualified Domestic Relations Order or QDRO.  QDRO’s cost an additional fee of $500 – $1,500 and they take time and work to finalize.

ROTH IRAs

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 withdrawn tax and penalty-free at any time for any reason.  The earnings on the ROTH IRA are different.  The earnings can be subject to taxation and the 10% early withdrawal penalty (before age 59.5) but you are able to take all of the principal before touching the earnings.  For example, if you have a ROTH IRA worth $40,000 today which you originally invested 15,000 in; the $15,000 is principal and the other $25,000 is earnings.  In this example, you can redeem the $15,000 with zero penalty and zero taxation while the rest can be left alone to grow.

4. Should you consider the value of retirement accounts after taxes when dividing assets in a divorce?

Many attorneys will “tax effect” retirement plans (discounting the account by the recipient’s marginal or effective tax bracket). Left unchecked, the spouse receiving more of the retirement accounts may benefit (possibly unfairly) in negotiations from this practice.  However, if your spouse is not playing fairly and trying to stick you with all the retirement accounts while they take all the cash, a tax effecting is in order.  Tax effecting can be as simple as taking 20% – 28% off the value of the retirement account and dividing that.  Or, it can be as complex as determining your effective tax rate and considering what assets will actually have to be used and tax effecting just those by the actual amount of tax you will pay this year (and possibly projecting out to the next few years).    By preparing financial projections, a CDFA can assess the amount and timing of the recipient’s anticipated withdrawals and tax liabilities from retirement accounts.

Questions About Divorce and Retirement Accounts? Let us help.  Retirement accounts are complicated, especially in divorce. Understanding tax implications and liquidity are critical in divorce negotiations.  You only have one shot to get this right.  Ensure you are receiving the settlement that’s best for you by having the right people on your team. Contact Divorce Strategies Group for a complimentary 30 minute phone consultation to discuss your specific needs.