4 Divorce Mistakes That Can Adversely Impact Your Retirement

8:44 pm Retirement Planning, Tax Planning

Divorce broken heart e1351693513676 4 Divorce Mistakes That Can Adversely Impact Your RetirementBeyond the emotional havoc that divorce can wreak, it can have a particularly devastating effect on the retirement plans of those who divorce later in life.  First, there is precious little time to recover financially when a nest egg for one now has to be split down the middle.

According to a recent Forbes article, here are 4 common divorce mistakes that you should avoid to minimize the financial damage to your retirement plans:

1.  Taking the house over other assets.  A house is a fixed asset that can cost you over time (maintenance, property taxes, etc.) rather than be a source of income for your golden years.  Try not to let emotion overtake good sense when dividing assets in a divorce.

2.  Ignoring tax repercussions of retirement funds.  When you withdraw money from a 401(k) or a traditional IRA in retirement, it is taxed as income.  Withdrawals from after-tax savings accounts like a Roth IRA are not taxed.  So if one of you takes the 401(k) and the other takes the Roth IRA, the one with the Roth IRA will get a larger payout in retirement.

3.  Not realizing consequences of IRA rollover right after the divorce.  Divorcing spouses under the age of 59 ½ have a one-time opportunity to withdraw funds from an ex’s 401(k) without incurring an early withdrawal penalty.  To do this, a QDRO (qualified domestic relations order) needs to be put in place beforehand.  Then, if you need some cash for divorce or other expense, you can get it without paying a penalty.  If you roll over a 401(k) directly into an IRA following your divorce, you cannot withdraw anything without paying the 10 percent early withdrawal penalty.

4.  Dipping into retirement savings because of the tax penalty waiver.  Just because you can take some cash out of retirement savings without a penalty once following a divorce (see #3 above) doesn’t mean you should.  You will need these savings for 20 or more years in retirement, so robbing your nest egg early will rob you of needed funds later on.

To avoid costly mistakes when it comes to retirement planning, contact our Newport Beach law firm.

Leave a Comment

Your comment

You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please note: Comment moderation is enabled and may delay your comment. There is no need to resubmit your comment.