Unfortunately many people make major mistakes regarding their retirement long before a divorce. The biggest mistake for the economically dependent spouse is to fail to have retirement savings in their own name. During a marriage many people are trusting and make the decision to put all retirement saving in one spouse’s name, usually the spouse earning the most income with the best employment benefits. This leaves one spouse with no retirement assets in his/her name.
Retirement assets accrued during the marriage are generally marital, meaning the court can transfer some, all or part of the account to either spouse. This would be fine provided the retirement asset is not dipped into during the period in which the parties are going through divorce proceedings. However, divorce is expensive and often people use all resources at their disposal to pay expenses associated with divorce. This means, there can be little to no funds left in the retirement account at the end of the proceedings and the funds are not recoverable provided the funds are used for a “family purpose.” The Courts in Maryland have determined that attorney’s fees fall into that category.
When a spouse is over the age of 50, there are even more pitfalls to be concerned about. It can feel that many major decisions must be made quickly under the pressure of ongoing divorce proceedings. It is important to be prepared.
One common mistake is choosing to keep the marital home and possibly trading retirement assets to keep the home and the equity in the home. The problem? A home’s future value can be difficult to ascertain, as evidenced by the volatility of the real estate market in the not so distant history. Retirement assets are usually more stable with a more assured outcome, especially with a well-diversified fund. Retirement savings also don’t have unexpected expenses that a house can have. It can be hard to detach emotionally from a marital home, but in order to protect a long-term future it may be necessary to do so. You don’t want to wind up with an “asset” you can’t afford that is falling down around you, unable to retire and destitute.
Another mistake is failing to account for the tax implications associated with different kinds of retirement savings. Some retirement vehicles are accrued pre-tax and are then taxed at the time of withdrawal and other are accrued post-tax and are not taxed at the time of withdrawal. That should be kept in mind what “equalizing” retirement assets. If one party has a retirement fund that is taxed now and the other has a retirement fund taxed at the time of withdrawal, they are not equal. A professional should be enrolled to advise on the appropriate exchange between the two accounts.
Finally, often people are not aware of the fact that they can take a one-time withdrawal without penalty at the time of transfer from a spouses 401(k) or 403(b) and they roll everything into an IRA. Often at the end of divorce people are in need of some immediate cash and could use the funds. However, the withdrawal has to be done at the time of transfer, prior to depositing into another retirement account. The key is in making sure only what is needed is taken. You don’t want to over withdraw and not have the money tucked away for retirement.