In this week’s case study, the “Money Talks” hosts discuss the situation of a couple with a pending divorce. They are aiming to keep the settlement amicable through mediation, planning on a 50/50 split of assets. Such a split is often a default decision based on the value of assets; however, some assets are worth more than others in future years. In three to five years, individuals who did not seek the expert advice from a financial planner may wish their decisions were different.
While divorce is an emotional issue with decisions you may not want to deal with, couples heading toward divorce need to understand the value and costs associated with their assets. All assets are not the same. A house may be worth as much as a 401(k), but the house is not a liquid asset an ex-spouse can use to make ends meet. It is an asset that may cost money in standard maintenance, repairs and taxes. A brokerage account has nearly no costs associated with it, and could easily be used for living expenses. Other assets, such as a 401(k) account, have future growth and tax rates that must be considered. Therefore a $1 million 401(k) account is not necessarily worth $1 million.
In this particular case study, the couple wants to avoid liquidating his 401(k) because of the tax consequences. Unfortunately, because divorce is common and retirement plans are among the largest assets, there are qualified domestic relations orders (QDRO). A QDRO is part of a divorce agreement that recognizes that the ex-spouse is entitled to receive a predefined portion of a participant’s benefits under a qualified retirement plan. The plan administrator can then send the ex-spouse assets in the plan without triggering the 10% early withdrawal penalty. The ex-spouse then has the option to roll the assets into an IRA, where income tax will continue to be deferred until withdrawal, or into a brokerage account, where ordinary income taxes due will be the responsibility of the recipient. The received assets can be divided into multiple accounts as well.
When a divorce involves child support payments, both spouses must consider the cost of all the children’s current and future activities and needs. If college costs are addressed as part of the settlement, be sure to address what may happen if one spouse cannot fund the future expense. A couple may consider a term life insurance policy to provide for college costs should something happen to either spouse.
Overall, couples facing divorce need to understand an equal division of assets is not always an equitable division. Divorce can be messy to start, but can only get worse if in three or five years the ex-spouses find they must go back to court. It’s often in a couple’s best interest to involve a financial planner before, during and after the divorce to help ensure a settlement that is beneficial for both parties. A financial expert can help an individual answer the question “How does my future look like with just me?”
A financial expert can provide services during a divorce beyond what a lawyer and an accountant may do. It is a service that the former spouses often stay with going forward into their new life. If you have questions on how a divorce may affect your financial future, experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
