A Collaborative Divorce generally takes less time than a litigated settlement. The speediness of action is facilitated by openness, the sharing of information, and the desire to work out a settlement that meets the needs of the husband, wife and child(ren). Although one party may need more time than the other to sort out and accept the new family situation, a supportive collaborative team coach will help both parties work towards the “end game.”
In my last blog, I talked about the separation of non-retirement assets. Retirement assets are a bit different as they generally are separated after divorce. The reason is that corporations and brokerage houses require documentation that the couple is legally divorced, so that any transfer of funds does not trigger a taxable event.
Remember, most retirement assets (other than a Roth IRA) have never been taxed when contributions were made. All the earnings grow tax deferred. It is only upon distribution that the assets are taxed. If assets are withdrawn prior to age 59-1/2, the government assesses a 10% penalty for early withdrawal. While this penalty can be eliminated during the divorce process if one spouse requires the money, this must be done before the assets are transferred over. Although you would eliminate the 10% early withdrawal penalty, the money withdrawn still would be taxed.
Question: Does our tax basis affect our retirement assets like IRA’s and Roth IRA’s?
Answer: Retirement asset division is a bit more complex. Asset division typically follows this rule of thumb: “I’ll take mine, you’ll take yours, and we’ll divide up the rest to make it equitable.” When retirement plans are eventually sold, there are taxes to be paid, since contributions and earnings have never been taxed. With Roth IRA’s, the taxes have already been paid on the contributions and when the money is withdrawn, the balance comes out tax-free. So again, with Roth IRA’s in the mix, consider the tax impact of each asset as if it were sold today, in order to get the proper valuation (see Part I for a further clarification of tax impacting).
Question: Can we divide up our retirement assets now – before the divorce is final?
Answer: It is important to know that prior to divorce, you cannot divide-up retirement assets – unless you are each keeping your own assets. If you will be receiving part of your spouse’s individual retirement account, there is a way to take control. You can have your spouse set up another IRA account and deposit the designated portion into this new account, naming you as the beneficiary and as the “Power of Attorney”. This way, you can change the investment strategy to be more suitable to your individual financial goals and objectives. The financial statements can go to your new address. At the time of divorce, you can simply change the name on the account to your name.
Question: And what about the company retirement plans?
Answer: Corporate retirement plans (Money Purchase, Profit Sharing, Pension or 401K plans) require a QDRO (Qualified Domestic Relations Order) to be submitted to the employer in order to split-up the asset. Although this asset cannot be divided prior to divorce, at least you will be able to take control of some portion of your assets sooner, rather than later.
The qualified financial professional on the Collaborative Divorce team can assist you with the tax implications of the division of your marital assets.