Gray divorces and tax changes complicate retirement

  • By Beth Pinsker,
  • Reuters
  • Saving for Retirement
  • Taxes
  • Retirement Accounts
  • Saving for Retirement
  • Taxes
  • Retirement Accounts
  • Saving for Retirement
  • Taxes
  • Retirement Accounts
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

When people over the age of 50 get divorced, retirement accounts become a key asset, even more so sometimes than the house or alimony. Lawyers and feuding couples are bracing for big changes at the end of 2018 for how these assets get split up.

While most of the tax law changes that were signed at the end of 2017 are in effect for the current tax year, the divorce disruption does not kick in until Jan. 1, 2019. The biggest direct impact is on alimony, which will no longer be a deduction for the person paying it, and no longer have to be claimed as income by the person receiving it.

Divorce attorney Malcolm Taub, of Davidoff Hutcher & Citron in New York, said this change is not actually driving the kind of rush to settle that experts had expected.

"It is a drastic change, but it seems like people are living with it," said Taub.

It turns out that the negotiations over the actual dollar value of alimony are the easy part. What is coming to matter more is where the money for the settlement is coming from, and how well-prepared each side is for the long-term.

Divorce settlements for those over 50 are complicated because of the working years left for both parties.

Lawyers like Taub still see many traditional gender breakdowns in that demographic; male breadwinner, wife who stayed at home to raise kids. Even among high-net worth clients, the two biggest assets are usually the house and the retirement accounts.

While there is always a sentimental attachment to the family home, you have to do the math.

"If the house is saddled with debt, you have to ask, can the spouse fund the expenses?" said Marilyn Chinitz, a divorce attorney at Blank Rome based in New York.

What Chinitz often advises is that the spouse who gets the house turn around and sell it, putting the proceeds into an investment account for retirement.

Consider the taxes

Chinitz also makes sure that if there is a split of the sort where one side gets the house and the other side gets what seems like an equivalent amount in an investment or retirement account, that the taxes be figured into the equation.

"If I ask if you would rather have $1 million in cash or $1.5 in a brokerage account. You'd say, I'd rather have $1.5 million. But if there are embedded capital gains, the real value could be $800,000," said Chinitz.

Another one to look out for: IRA or 401(k) assets versus Roth assets. If you have $20,000 in each account, they are not equal because of the tax treatment of distributions - the Roth is worth more because the taxes have already been paid.

Key after this tax year will be the valuation of private businesses, because the tax changes gave out corporate breaks. But higher cash flow might not be known until the following year. Even if you are not selling a business, you still need to assess its value in a divorce.

Especially in the case of pensions, Chinitz cautioned to have a proper legal order for any asset distributions, because the tax penalties could be enormous.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© Reuters 2018. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.