A marriage can last a long time, but even couples in Virginia who have been married for decades can one day decide to divorce. But, older couples will have to keep retirement in mind when it comes to property division. This is especially true in a high asset divorce.
As tempting as it may seem, it is not always financially savvy keep the family home in exchange for a retirement account. Home ownership is expensive. If there is a mortgage on the home, it will need to be paid. Homes will need repairs and updates. One must also pay for homeowner’s insurance and property taxes. And, should the time come to sell the home, there is no guarantee that it will sell at a price that allows a person to adequately fund their retirement.
And, if a spouse is awarded a retirement account in a divorce, they should understand the tax consequences that come with it. In pre-tax accounts, such as 401(k)’s, funds withdrawn during retirement will be taxed. Conversely, after-tax accounts, such as Roth IRA’s, are not subject to taxation when funds are withdrawn during retirement. Therefore, a 401(k) worth $200,000 will ultimately not be as valuable as a Roth IRA worth $200,000.
Additionally, a spouse going through a divorce who is under 59.5 years old can take funds out of the other spouse’s 401(k) or individual retirement account in a one-time lump sum without being subject to the 10 percent tax penalty. This is possible if there is a qualified domestic relations order in place that allotted the funds to that spouse. If a spouse who is under 59.5 years old wants to withdraw some of their share in the IRA, they should do so before rolling over the account, so they are not penalized on the withdrawal.
However, it is important for a spouse to be careful about how much the take out of their ex’s retirement account in that one-time lump sum. Spouses should keep in mind that the funds in these accounts need to last them the rest of their lives. Making a budget can help spouses determine how much they should withdraw from a retirement account.
These are only a few tips on how to handle a retirement account in a high asset divorce. In the end, each spouse’s situation is unique, and there is no one-size-fits-all solution. Therefore, spouses who want to learn more about retirement accounts and divorce may want to discuss the matter with a professional.
Source: nextavenue.org, “4 Divorce Mistakes That Can Derail Retirement,” Aug. 9, 2013