Divorce among couples near retirement age has its own custody complications: how to divvy up the retirement accounts.
For baby boomers, divorce is soaring. The divorce rate among adults over age 50 doubled between 1990 and 2014, according to a report by the National Center for Family & Marriage Research. For those over 65, divorces tripled during roughly the same period.
“A rising divorce rate is becoming a very consistent trend with the baby boomer generation,” said Joslin Davis, president of the American Academy of Matrimonial Lawyers. “It’s very unsettling, if not downright scary, for people who are older without much earning capacity left to face a divorce as they are looking forward to retiring.”
Second only to alimony, retirement accounts and pensions were the most fought over, according to a recent survey by the academy. To that end, here are the dos and don’ts of dividing a nest egg for those in their golden years, just when they need it most.
Who owns the accounts?
“Retirement benefits acquired during the marriage are generally divided 50-50,” said Carolyn Woodruff, a North Carolina family law specialist. “The couple as a unit has retirement savings they intended to use in one household, and now those retirement funds need to service two households,” she said.
“There are a number of people who we represent who say, ‘I have socked away every month and I don’t see why I have to divide it with my spouse,'” Davis said. “The law says ‘too bad.'”
Marriage is an economic partnership, and in the vast majority of cases that account is marital property, Davis said.
When a marriage ends, it’s also a good time to check or change the beneficiaries of those accounts, said Jeffrey Levine, chief retirement strategist at Ed Slott & Co. “After any life event, and especially a divorce, people should always be sure to review their beneficiary forms to make sure they still reflect their wishes,” he said.
Consider the other man in the picture
Uncle Sam has a lot to do with what those retirement accounts are worth now and will be worth when you are ready to tap them.
While most retirement accounts, like a pension, 401(k) or IRA are taxed when you take the money out, a Roth 401(k) or Roth IRA, is taxed when you contribute and then it’s tax-free when you withdraw from your account in retirement after you meet certain requirements.
“You have to look at the after-tax impact,” said Dennis Notchick, a certified financial planner with Safeguard Investment Advisory Group in San Diego. Whether you’ve paid taxes on the money upfront, or will be paying taxes on it later, makes a big difference to the asset’s value.
Retirement accounts are not all equal
Because of that, retirement accounts should be divided on their after-tax value, Levine said.
When going from filing jointly to filing single, where there is a high earner and a lower earner, the IRA or 401(k) will be worth more or less to each party depending on their tax bracket.
If a couple is dividing a $200,000 401(k) or IRA, and they are taxed at different rates, Levine sometimes recommends adjusting for their tax brackets to ensure that they each receive an equivalent after-tax value, which may mean that one spouse takes $110,000 and the other gets $90,000.
Each spouse would then take their required minimum distributions based on their individual balances going forward, Levine said.
Don’t swap retirement accounts for real estate
Just as splitting each retirement plan is more equitable than trading one account for another, the same goes for trading retirement accounts for other assets.
“Lots of women go for the sentimental assets, particularly the house if that’s where the family gathers,” said Angie O’Leary, a senior vice president at U.S. Bank Wealth Management, but “that’s not necessarily in her best interest.”
Family homes are often expensive to maintain and can draw down funds rather than increase in value, like a retirement account, O’Leary said.
In addition, it’s easy for the dependent spouse to underestimate exactly much a 401(k) could be worth, she said.
“If it’s been maxed out over an entire career, it could be close to $1 million — it’s a big asset,” she said.
“For the spouse that forgoes the retirement account to get the house, that’s not a good financial decision to make in the long run,” said Notchick.
“For people divorcing in their 50s and 60s, you don’t want to start over from square one. In 10 years, that lack of retirement account is going to hurt you.”