When you get a divorce in California, each spouse is entitled to 50% of the community property assets and debts. Sounds simple enough, right? Not so fast. Which assets and debts you take can have a significant financial impact for you in the long run.
1. Exchanging the house for the retirement account.
A lot of divorcing people assume that one party should keep the house while the should take the retirement account. However, this may not be a good financial move. Before you make any final decisions, consider the following:
- You are going to spend money maintaining the house (ie, routine maintenance and upkeep, unexpected repairs), whereas you will spend less or no money maintaining the retirement account.
- The home’s future value is questionable (remember when the real estate bubble burst not too long ago and home values plummeted?) whereas the retirement account, if invested well, will likely increase in value.
- Consider the tax benefits of owning a home, capital gains taxes you may owe when you sell the house, and the income taxes you will owe on the retirement income when you start receiving it.
2. Not all retirement accounts are alike.
Before deciding which retirement or investment account you want in the divorce, consider the tax implications of each account. For example, $100,000 in a pre-tax account (such as an IRA, 401k, 403b, or other deferred compensation account) is not the same as $100,000 in a post-tax account (such as a Roth IRA). If you take the pre-tax account, you will eventually have to pay taxes on that money when you withdraw it (and a penalty if you withdraw it early). In contrast, if you take the post-tax account, the taxes were already paid so you won’t have to pay any taxes in the future.
3. Rollover IRA.
When you divorce, you may not have to rollover your share of your ex-spouse’s 401k or 403b into a rollover IRA. Under current tax laws, a divorcing spouse under age 59 ½ can withdraw money from their ex-spouse’s 401k or 403b without paying the normal 10% penalty, so long as the withdrawal is pursuant to a Qualified Domestic Relations Order (QDRO). Consult a financial advisor or tax specialist before you make any decisions about what to do with your share of the 401k or 403b.
4. Court Battle = Money
Divorce is emotional. However, do not let your emotions get the best of your pocketbook. Many people will hire an attorney, go to court and use the courtroom as a battlefield. This will drain you both emotionally and financially. The money you spend fighting in court is money you can spend on your children and your future. Clients often tell me that they want to go to court to prove a point or for the "principle" of the matter. You can do that, but it comes at a price.
Divorce is not about winning or losing. It is about making the best decisions so that you can move on with your life. At California Mediation Solutions, our certified divorce mediator can provide you with information and options to help you make the best decision for you and your family. We work with accountants, tax professionals, and financial planners so that we can help you understand the other financial implications of your options before you make a decision. Contact us at 951-328-8400 for a FREE consultation and see how the modern approach of mediation will save you time, money, and heartache.