From "We" to "Me": Dividing Assets in a Divorce

The division of shared assets and liabilities significantly impacts your post-divorce quality of life. Knowing the different types of assets, costs, and taxes is important for making informed decisions during divorce.

Homes and retirement accounts often represent a household's primary wealth. When you own a home, you need to consider various costs. These include mortgage payments, taxes, maintenance, and repairs.

It's also important to think about the value of the home. Retirement accounts, meant for retirement, may need early withdrawals during divorce, leading to taxes and penalties.

Some things are valuable because of emotions, not money. Life insurance can provide peace of mind and may have cash value, especially in whole life or universal life policies.

Emotionally charged issues may not align with the priorities crucial for moving forward with your life post-divorce.

Navigating Asset Division During Divorce

When contemplating a fair distribution of assets, it's essential to recognize that certain accounts receive disparate tax treatments. Consequently, two accounts of equal value may diverge in worth once taxes are factored in.

For example, $100,000 in a Roth IRA is usually worth more after taxes than $100,000 in a traditional IRA. This occurs because you can withdraw money from a Roth IRA tax-free. If you withdraw money from a traditional IRA after age 59½, you must pay taxes and maybe penalties.

During a divorce, assets like an IRA or HSA can be divided. To do this, you typically need to complete a form called "transfer incident to divorce." You also need to submit the divorce decree.

Regarding taxable investments, options include selling the investments and allocating the proceeds or directly dividing the investment holdings. It's imperative to weigh any tax implications associated with liquidating investments within a taxable account.

Furthermore, equity compensation plans, encompassing assets like stock options, can significantly impact the overall financial settlement and warrant careful consideration within the agreement.

Navigating College Savings and 529 Plans Amid Divorce

When faced with divorce, it's crucial to anticipate how it may impact college savings, particularly if you have children. When deciding on colleges for your children, it can be helpful to look at different options. This could include expensive private schools or less expensive community colleges. The best choice may depend on the ages of your children.

Planning ahead can make the process easier. College savings accounts, including 529 plans, might be deemed marital property depending on jurisdiction. Consequently, ownership of such accounts could become a negotiating point during divorce proceedings.

Financial institutions may impose specific documentation requirements for transferring ownership of a 529 plan in the event of divorce. Thus, it's prudent to familiarize yourself with these requirements to ensure a smooth transition.

Divorce and Social Security Benefits

If your marriage lasted for a decade or more, and you've been divorced for over two years while remaining unmarried, you have the option to claim Social Security benefits based on your former spouse's work record once you turn 62. You can choose to receive benefits based on your ex-spouse's work history. This can be done instead of using your own work history. The decision should be based on which option would give you more money.

If you are divorced, you can receive half of your ex-spouse's retirement benefits when you reach full retirement age. This means you will be entitled to a portion of the amount your ex-spouse receives. You can begin getting these benefits when you reach the age to get your full retirement benefits.

Splitting Workplace Retirement Accounts with a QDRO

To split retirement savings from a job like a 401(k) or pension during a divorce, a QDRO is needed. This court-issued document facilitates the division process.

Getting approval for a QDRO can take a long time, sometimes several months. The plan administrator must approve it. Be ready for a lengthy process.

A significant concern when dividing retirement accounts is the potential loss of tax advantages associated with these accounts. However, there exists a method to divide assets on a tax-deferred basis. Seeking guidance from a qualified tax advisor is advisable to fully comprehend and assess these tax implications.

The Impact of Divorce on Life Insurance

Certain types of life insurance policies can factor into the overall net worth of a household. Whole life insurance builds cash value over time, unlike term life insurance which only provides a death benefit. In certain instances, divorcing couples might be required to divide such policies as part of their settlement.

Bottom Line

In a divorce, how assets and debts are divided can greatly impact life after the divorce. Homes, retirement accounts, and life insurance all have their own complexities and implications for individuals and families. Navigating this terrain demands not just financial acumen but also an understanding of the emotional resonance certain assets hold.

Sources: 
https://www.fidelity.com/learning-center/life-events/how-to-divide-assets-in-a-divorce

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

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