- Homes and retirement accounts are often a household’s primary source of wealth. Your home may be worth a lot of money, but if one party is keeping the house, they need to consider carrying costs including the mortgage payment, taxes, maintenance, and repairs. You and your spouse may have accumulated a lot of money in retirement accounts. Those accounts are meant for use in retirement, but sometimes in a divorce you might need to make early withdrawals. Just remember that those early withdrawals are subject to taxes and penalties.
- Some things have sentimental value that is worth more than money. Others, like life insurance, can provide long-term peace of mind, as well as some cash value if it’s whole life or universal life insurance.
- The most emotionally charged issues may not be the ones that are important as you move on with your life.
One of the factors in your quality of life after divorce is how you divide your shared assets and liabilities. It is important to understand the different types of assets, and the costs and taxes associated with each, to make informed decisions in a divorce.
If you're considering how to fairly divide assets, remember that some accounts get a different tax treatment than others. That can make 2 accounts that are otherwise equal in value, more or less valuable after taxes are considered.
For example, after taxes are considered, $100,000 currently in a Roth IRA is worth more than $100,000 currently in a traditional IRA. That's because qualified withdrawals from the Roth will be tax-free while qualified withdrawals from the traditional IRA account after age 59½ will be taxed as ordinary income. Early withdrawal penalties may also apply prior to age 59½.
To divide an IRA or health savings account (HSA), financial institutions generally require the parties to send a "transfer incident to divorce" form as well as a copy of the divorce decree.
When it comes to taxable investments, you may be able to sell the investments and divvy up the proceeds or you can otherwise divide the investment holdings. It's important to consider any tax consequences associated with selling investments in a taxable account.
Likewise, an equity compensation plan that may include assets like stock options can also be a significant percentage of your overall financial picture and therefore an important aspect of the settlement agreement.
How divorce affects college savings and 529 plans
Depending on your childrens’ ages, it may also be useful to consider various college scenarios—for example, getting into a pricey and prestigious private school versus a less-expensive community college or state school.
Deciding ahead of time how to handle things may smooth the way ahead. College saving accounts, like a 529 plan, may be considered marital property depending on where you live. That means that ownership of the account may be part of the negotiations.
Financial institutions may require specific documents to transfer ownership of a 529 plan due to a divorce so it could be a good idea to investigate the requirements.
Social Security and divorce
If your marriage lasted 10 years or more and you’ve been divorced for more than 2 years, and are unmarried, you can claim Social Security benefits on your ex-spouse's work record once you reach age 62. However, you can only file on your ex-spouse's work record if the benefit you would get based on your own work is less than the benefit you would receive based on your ex-spouse's work.
Your benefit as a divorced spouse is equal to half of your ex-spouse's full retirement amount, if you start receiving benefits at your full retirement age.
Dividing workplace retirement accounts with a QDRO
A qualified domestic relations order (QDRO) is a court-issued document required to divide qualified workplace retirement plan assets like a 401(k), 403(b), or a pension plan.
Expect this process to take some time: The processing of a QDRO is often lengthy, can take months to be completed, and requires plan administrator approval.
A major drawback of dividing retirement accounts can be losing the potential tax benefits that go along with these accounts. But there is a way to divide assets on a tax-deferred basis. It’s a good idea to always speak with a qualified tax advisor to understand and evaluate these tax considerations.
How divorce can affect life insurance
There are some types of life insurance that may be considered as part of the household’s net worth. While they do provide a death benefit like term life insurance, whole life insurance policies accrue a cash value. In some cases, divorcing couples may be ordered to split the policy.