Getting a divorce at midlife can have a disastrous effect on your retirement. It may reduce your income or force you to work for longer than you had planned or force you to obtain part-time employment rather than completely retire. Having an attorney that understands the implications of your divorce settlement is key. There are a few things that may help you to minimize the damage a divorce has on your retirement.
- Blindly choosing the house over financial accounts. Some people assume choosing the house is always the best way to go. This is not necessarily true. A house comes with ongoing and unexpected maintenance costs and has an undeterminable future value. In deciding between the house over financial accounts, consider potential appreciation of the property and the tax consequences involved in receiving either asset.
- Ignoring tax implications of retirement accounts. Don’t forget the government will take its share when you withdraw money from a pre-tax account such as a 401(k). In the alternative, with a Roth IRA you have already paid taxes on the funds so you won’t be taxed when you take it out during retirement. Consider the type of the account when dividing retirement accounts.
- Rolling your spouse’s retirement account directly into an Individual Retirement Account immediately after divorce. If you’re under the age of 59 ½, using a QDRO can allow you to withdraw money from your ex-s 401(k) or 403(b) without owing the normal 10% tax penalty so you can have “immediate” access to the funds rather than waiting until retirement. If you roll the money into an IRA and then you need to pull some out to cover your costs, you will b subject to the 10% tax penalty.
- Dipping too much into retirement savings due to the tax penalty waiver. Divorcing individuals may take too much of retirement savings because they can avoid the 10% tax penalty. Take the time to assess your current and future cash flow and needs. If you take too much money out too soon you may be hurting yourself in the long run.
If you’re going through a divorce and have questions about dividing your retirement accounts, speak with one of our experienced attorneys regarding your individual situation today.
In June 2013, in United States v. Edith Schlain Windsor, in Her Capacity as Executor of the Estate of Thea Clara Spyer, et al., the Supreme Court of the United States (SCOTUS) declared Section 3 of the Defense of Marriage Act (DOMA), which defined marriage as between one man and one woman, to be unconstitutional. The impact of this decision is to extend federal benefits from agencies such as the Social Security Administration, Department of Veteran’s Affairs, and Internal Revenue Service, to same-sex couples in legal marriages. It is significant to note that SCOTUS’ decision did not extend benefits to same-sex couples in civil unions or domestic partnerships. Nor did SCOTUS’ decision go so far as to find a federal recognition of same-sex marriage.
The Court’s decision failed to account for the fact that 37 out of 50 states, including Illinois, do not currently recognize same-sex marriage. This has led to same-sex couples travelling to states that do recognize same-sex marriage to obtain one. What happens if these marriages end in divorce? If the state where they reside does not recognize same-sex marriage, they are also not in a position to perform divorces of same-sex couples. In addition, most states have minimal residency requirements in order to be able to file for divorce. Such as, in Illinois you must be a resident of the state for at least ninety days preceding the filing of your Petition for Dissolution of Marriage. This could lead to many couples staying in marriages they no longer want to be in because there is nowhere for them to turn. For this reason, there is no doubt that state legislation is to come on this issue. Because of these complicated issues, it is important to know the law in your state as well as in any state you may relocate to
Divorce costs more for same-sex couples because it is a new area of the law and the process may be prolonged. The most difficult issue to determine is when the financial commitment between the parties began as same-sex marriage has only recently, since 2005, become available in the United States. A prenuptial agreement can be especially helpful for same-sex couples. A prenuptial agreement can help these couples save a lot of time and money in determining when their financial commitment to one another began.
As this new area of the law is constantly evolving, you need an attorney that understands the implications of SCOTUS’ DOMA decision and how these factors work in your state. At this point, SCOTUS’ decision has minimal impact on same-sex couples in Illinois because Illinois does not yet perform same-sex marriages. Same-sex couples that have traveled to marry and reside in Illinois will likely receive federal benefits, but the exact benefits are currently unclear. Each agency will offer guidance to same-sex couples in this situation. Before they adjourned their session in May 2013 a bill in the Illinois House of Representatives was not brought to a vote. This matter will likely be brought back in the November session.