This is the fourth blog in the Divorce and Finances series, addressing common questions I hear as a Certified Divorce Financial Analyst (CDFA) during the pre- and post-divorce process. This blog will address questions about retirement asset division in divorce. A podcast version of this blog series can be found on our resource center here.
Should I request more or less retirement assets in my divorce settlement?
Requesting retirement assets in your divorce settlement will depend on your ability to accumulate retirement assets post-divorce as well as your present need for funds. Accumulating retirement assets outside of employment or a business is limited. While the maximum annual IRA contribution in 2021 for those under age 50 is $6,000 per year ($7,000/year for those over age 50), the limits associated with 401K’s, 403(b)’s, deferred compensation plans and other employment/business related retirement assets are considerably higher. It is worth noting that retirement assets are often tax deferred and thus the future tax consequences of withdrawal must be analyzed and understood. A Certified Divorce Financial Analyst will help assess if you should retain and grow retirement assets or if your situation is better supported with taxable assets to meet your current and future cash flow needs.
Do future jobs effect the decision of which assets to take in divorce?
Yes. If future employment prospects for a spouse suggest a diminished ability to accumulate retirement assets post-divorce and that spouse does not have an immediate need for present funds, it may be wise to increase the allocation of assets from the “retirement” category.
Do taxes affect which kind of assets to take in the divorce?
Yes. Divorcing spouses must understand the taxes associated with every asset group subject to Equitable Distribution. Retirement assets are typically pre-tax assets with penalties for early withdrawal. There are restrictions on accessibility prior to age 59 ½. Even after that point, the funds withdrawn will be taxed at the time of withdrawal. Note, however, that under “double-dipping” concepts, income from pension benefits that have been treated as an asset for equitable distribution purposes may not be considered in determining alimony; conversely, income from pension benefits earned after the marital partnership has ended may be considered for purpose of alimony modification.
For more relevant blogs on divorce finances, please check out the other articles in the series: