Couples often don’t consider their retirement plans when making the decision to divorce. The immediate financial and emotional concerns over child custody, alimony, visitation, bills, and property distribution usually take up most of their attention.
Distribution of Retirement Funds can be Forgotten in the Moment
Many believe that they will automatically be able to keep their retirement funds, no matter what, and not have to give up any to their spouse. Or maybe you thought you would get your share of your spouse’s retirement fund.
What then can, happen is that they are caught off guard and very well may end up having a distribution of retirement funds that they didn’t even want to agree to. It is like they allow this issue to slip through the cracks without even knowing it.
Keeping the House is Not Always Best
For many divorcing couples of middle or older age, the homestead is not always the most expensive asset they own, especially if both parties have been saving for retirement on a regular basis. Many times, the house is heavily mortgaged, so its value after subtracting the mortgage liability is much less than your retirement accounts.
Because of that, it may make more sense to try to keep retirement savings for yourself instead of vying to get the marital home. Homes require expensive maintenance, repairs, tax and insurance payments, and even mortgage payments if it is not paid off yet. Depending on your retirement account balances and your future, it may be much more beneficial to agree to sell the house or even allow the other spouse to retain full ownership.
Tax Advantages to Consider
Tax advantages can sometimes help make the decision for you. An IRS rule that many couples may not be aware of is the one-time opportunity for a spouse under the age of 59½ to withdraw money from his or her ex’s 401(k), IRA, or 403(b) without owing the normally required 10 percent tax penalty.
This tax savings is available if the funds are allocated under a qualified domestic relations order (QDRO.) If you need some or all the money now, you can withdraw funds too, but you will have to pay the 10 percent penalty.
Defined Benefit Plans are a Different Story
A defined benefit plan works a little differently. Until you or your spouse are “vested” in your plan after a certain age, you have no right to any of the funds. If you leave your job, your defined contributions plan isn’t portable like a 401(k) or IRA. However, a judge can award a spouse a share of the plan. These plans aren’t valued in actual present dollars, so valuation is a much more difficult task. Often an expert must be hired to determine a valuation for the distribution to be equitable.
Attorney Rex B Bushman is an experienced family law attorney who is here to help you with your personal legal needs. Call at (801) 652-9413 or email at info@rexbbushman to schedule a time to talk about how he can help you.