Dividing property can be one of the most challenging and complex pieces of a divorce. What appears to be an easy decision such as “I want the house, you keep the investments,” may in the end deliver a settlement nobody bargained for.
Jan and Neal are getting divorced and they are both age 64. They have two assets: an IRA worth $180,000 and a money market account worth $180,000. Jan was really concerned about retirement and wanted to take the IRA, as it provided a sense of security.
After the divorce, they each wanted to buy a house. For his down payment, Neal took $90,000 out of his money market fund. Meanwhile, Jan withdrew $90,000 from her IRA to make her down payment. But because Jan was withdrawing monies from an IRA, her distribution was subject to income taxes. Therefore, after paying nearly $30,000 in estimated taxes, Jan only realized $60,000. During the divorce process, Jan had not been counseled on the potential issues of only taking the IRA. That short-sighted decision ultimately left Jan less financially secure.
Remember, you cannot equally compare a cash account with a retirement fund because of the tax issues. It seems like an issue that’s easy to avoid, but most people engaged in the divorce process ignore it. Oftentimes, when crafting a financial settlement people want to see the retail value of each asset, when it’s extremely important to also look at the after-tax value. Having a clear understanding of how assets work is an integral piece of divorce planning, and thus will allow clients to make the best decisions for their financial future.