Suzanne Riss and her ex-husband knew going into their divorce that they needed to consult a financial expert. Divorce, even a simple one, still involves a decent amount of complexity when dividing assets, including retirement savings. Not to mention, it's a highly emotional moment — Riss in particular was navigating a divorce as well as balancing a full-time job and caring for a young son.
Divorce is far from simply signing a paper that officially ends a marriage. Riss didn't know how much she had in her retirement account, or what her soon-to-be ex-husband had either. She didn't know where she would live. She knew she was financially capable of supporting herself, but not all of the details of her accounts and assets.
For the most part, the saying "what's yours is mine and what's mine is yours" is true when it comes to assets accumulated in a marriage, including money in a 401(k) plan and individual retirement accounts. Gifts and inheritances don't count toward marital assets, but everything else is usually fair game.
Because divorce is naturally a highly emotional time, some people may not want to dive into what they own or what they're owed, which could financially hurt them in the long run, said Riss, who co-authored "The Optimist's Guide to Divorce: How to Get Through Your Breakup and Create a New Life You Love." Divorce is common among all age groups, but lately, even baby boomers are divorcing at a soaring rate. "It's a case of what you don't know may hurt you," Riss said.
For starters, each spouse should begin collecting financial data, such as the accounts that they have with their partner, also known as marital assets, or accounts they had before their marriage, known as separate property. In some cases, assets within an investment account might be divided into what was a premarital contribution and what part of the investments grew with money the spouses shared, said Peter Huminski, a financial adviser at Thorium Wealth, who saw this happen with a client.
Even before getting married, it is good practice to keep records of all investment and retirement accounts and look at account performance as well as balances year to year.
Dividing retirement assets in particular can be difficult, since the couple likely planned on retiring together and to share that money, Huminski said. Nonworking spouses are entitled to a portion of their spouse's Social Security benefits, for example, and some retirement accounts, even in one partner's name, may be shared among both partners if the assumption was they'd share it later on in life.
Test your 401(k) and IRA smarts
All accounts (traditional or Roth individual retirement accounts, 401(k) plans, and other qualified or nonqualified plans) have different rules for how they can be divided or withdrawn without causing a landslide of taxes and penalties, so it's important to know what those are before acting, Riss said.
Spouses may also need to obtain a "qualified domestic relations order," known as a QDRO, which is a court order in a divorce agreement naming one spouse as entitled to a portion of the other's retirement plan. After the divorce has been finalized, the ex-spouses may forget to update their beneficiaries on their financial accounts, which could cause a problem, because the existing beneficiaries can still be legally enforced despite the divorce, Riss said.
Once the divorce has happened, a person's accounts may have less than it did during the marriage. The first step is to determine what the "new normal" lifestyle will be, and create a budget and plan to rebuild the assets that are no longer there, said Tim Hewitt, a senior wealth adviser at Wiley Group in Conshohocken, Penn. "A lot of times with a partner you're doing all of this planning together, where now you're the master of your universe and you don't have people to rely on," he said.
In order to do this, emotions will have to be set aside, he said, so that decisions are made for the person's best interests, and not because of how they felt at the time. A home shared in marriage may mean a lot to a divorcee, but it may also become a financial burden.
The key is to keep going, and knowing these tasks are what have to get done. "I remember feeling exhausted, and wanting to wrap things up with my divorce as quickly as possible," Riss said. "I had to force myself to be patient."
|For more news you can use to help guide your financial life, visit our Insights page.|