Once you get past the emotional heartache, divorce is all about the finances. If you have any retirement funds built up during the marriage, those can take a big hit during a divorce.
Here’s some solid advice to use when you’re going through a divorce that will help keep your future secure — despite your rocky present:
1. Don’t raid your retirement fund to pay for your divorce.
While legal fees can easily hit $15,000 or more for a divorce, that may only be part of your costs. You may have to divvy up the equity in a house, stocks, bonds and other things.
If possible, negotiate with your spouse to avoid this. If your spouse doesn’t actually need the money right now from any divided assets, you’ll avoid the taxes and penalties that would come with taking money out of your retirement. This will often benefit your spouse as well — since he or she may also be entitled to part of the retirement down the line. If so, that’s a great negotiating point.
2. Make certain all assets are valued appropriately.
You can have two accounts that seem fairly equal but actually end up being very different once the Internal Revenue Service gets involved.
For example, assets in a 401K are taxed when withdrawn, while assets sitting in a Roth IRA have already been taxed. If you aren’t paying attention to how every retirement plan works, you can end up shorting yourself. If you have complicated assets, it’s important to get a valuation of everything both after taxes and projected future values — that way, you know what you’re agreeing to divide.
3. Make sure that your divorce decree includes the right language.
Forgetting to ask the court for a Qualified Domestic Relations Order can be a disaster — without that court order, you’ll be subject to penalties for withdrawing funds from an account in order to divide it up. You also only have a year to divide things after your divorce to avoid taxation — so there may not be time once you notice the mistake to go back to court for the order.
While divorce is rarely easy, you’ll find it easier to handle if you follow these tips and keep the future in mind.
Source: The Motley Fool, “How to Protect Your Retirement Savings During Divorce,” Sarah Szcypinski, accessed Feb. 16, 2018
