3 Considerations for Retirement
When a divorce occurs, what steps should a person take to ensure they can still comfortably retire? With gray divorces rising, married couples of all ages should know about the possible consequences of divorce on their retirement income. A story in the Washington Post talks about some of the considerations. The woman in the story thought that she had enough to retire on through her ex-husband’s annuity, keeping the house they lived in, and her teaching pension, but it turned out that it wasn’t going to be enough.
Here are some gotchas that we’ve seen about retirement assets that you should be aware of before you undergo a divorce.
Not paying attention to retirement plan withdrawal penalties
Even if you choose the retirement plan, a pre-tax account such as an IRA, 401(k) or 403(b) account will be charged taxes on any money withdrawn. Uncle Sam always gets his share. These taxes must be accounted for. When you are calculating your share of assets during a divorce, don’t forget this important calculation.
Rolling a spouse’s retirement account directly into an IRA after divorce
Fortunately, the law allows for a one-time opportunity for spouses under 59 ½ to withdraw money from their ex’s retirement savings accounts without paying the 10 percent tax penalty after a divorce. This lets divorcing couples split a retirement account without tax worries at the time of the divorce. Sometimes one partner will use this money to pay for the divorce proceedings. While this is a valid use, if you’re under the age of 59 ½ you will have to pay taxes on the withdrawal. If you must withdraw money, remove only as much as you need. Not only will you have to pay taxes, but you’ll lose the investment opportunity of that money growing over time.
Choosing the house over other financial assets
One large area of contention is property. Losing your home can feel humiliating in the short term, but it can cost you money in the long-term. As the housing crisis showed, homes can lose money quickly. Also, whoever gets the home will be responsible for things like maintenance and upkeep, as well as property taxes. If you’re willing to be flexible and move to another place, you can save a lot of money. A better option would be to choose something like a portion of your spouse’s 401k or other retirement funds. These are more stable and more likely to appreciate over time compared to a home.
There are also other financial considerations that older people have to consider post-divorce like claiming each other’s Social Security benefits. These benefits can be quite significant if you were married for ten years or longer prior to your divorce. See this page from the Social Security Administration or call our office for more details.
With the growing number of gray divorces, questions about how to handle retirement accounts are increasing. Speak with a qualified family law attorney today about your concerns. If you live in the Fort Lauderdale area, contact Gustavo E. Frances today for a consultation. A little advice now can save you a lot of money in the future if you are planning to divorce late in life.