Who: Divorce experts and financial planning professionals Deb Johnson and Suzanne Chambers Yates. Learn more about their experience here.
What: Frank conversations covering everything from "Do you Dare Divorce During COVID19?" to "How, When and What to Say to the Kids" and everything in between.
When: Every Friday beginning May 1st, 2020 at 2 PM MDT.
Installment 1: "Do I Dare Divorce During COVID19?" aired May 1, 2020
Installment 2: "Should I Stay or Should I Go?" aired May 8, 2020
Child Centered Pledge - Part of a peaceful resolution means recognizing that your child(ren) should be priority #1. Both spouses refer to this pledge for guidance in all matters related to their children.
Household Inventory Worksheet - When divvying up household items, make an inventory, note ownership and determine if anything is up for discussion
If you’re thinking about beginning divorce proceedings, chances are you’ve began thinking about what your financial situation will be after a divorce? Will you be able to afford to keep the home the kids were raised in? Can we afford to support two households? How will the changes in income affect our children?
When it comes to assets, often the family home is a big part of the financial picture and figuring out all of your options might feel overwhelming. So, let’s take a look at what you should be considering when it comes to your real estate investment as part of a divorce..
When we look at the real estate a couple jointly owns or acquired during the marriage, we’re including not only the residence, but also any rentals, timeshares, and land. Depending on the type of real estate, how it is titled, and whose name is on the mortgage, proper disposition of real estate is tricky due to tax traps and financing obstacles.
We also know it is important to do a complete forward-looking cash flow analysis; this helps the client see the future financial picture of home ownership and we help them determine how much they can afford, how much should be used as a down payment vs. be financed.
Sometimes, especially in the current Colorado real estate market, a marital residence must be sold in order to secure another residence, or a residence may need to be purchased as an investment property while still married just to make sure the family has a place to live.
Because this transaction and its timing is so complex, it is of utmost importance that all angles are analyzed, and the impact clearly known; this includes the moving and market readiness costs that are involved and how the marital residence is titled along with other potential issues with lenders. We work closely with Certified Divorce Lending Professionals (CDLP), to help navigate the complex maze of mortgage lending.
Bottom line, yes a home can be sold/bought in conjunction with a divorce, however it must be done with an abundance of caution!
In general, you cannot take distributions before age 59-½, as the are subject to a 10% penalty tax if you do. You can avoid the penalty if you become disabled, die, or receive a retirement distribution in divorce from an ex-spouse’s (i.e. 401(k), 403(b)).
Let’s take a look at what happens when the ex-spouse receives the 401(k) asset. There are some specific rules to be aware of.
Sarah was married to an airline pilot who was nearing retirement. They were both age 55. There was $640,000 in his 401(k) and the retirement plan was prepared to transfer $320,000 to her IRA. She could transfer the money to an IRA and pay no taxes on this amount until she withdraws funds from the IRA. But Sarah’s attorney’s fees were $60,000 and she needed to pay those to avoid a lien on her property.
If done correctly, Sarah could take the $60K cash she needed from her soon-to-be exes 401(k) and roll the other into an IRA in her name. She would owe the ordinary income tax but would save the 10% penalty or $6,000.
After the money from a pension plan goes into an IRA, which is not considered a qualified plan, Sarah is held to the early withdrawal rule. If she says, “Oh I forgot, I need another $5,000 to buy a car,” it is too late.
She will have to pay the 10% penalty and the taxes on that money.
It is important to understand the subtle differences when transferring money from qualified plans. One type is a direct rollover where the check is made payable to the company where the IRA is held; not payable to the client. The check may be sent directly to the IRA custodian or the client, however, the check is made payable to the custodian of the funds.
The other type is a 60-day rollover, where the distribution is made payable to the client with 20% withheld for Federal taxes. It is then up to the client to get the funds back into an IRA within 60 days. Additionally, the client must put in the additional 20% withheld for federal taxes for the entire transaction to be a non-taxable event.
The Unemployment Compensation Amendment Act (UCA), which took effect in January 1993, stated that any monies taken out of a qualified plan or tax-sheltered annuity would be subject to 20% withholding. This rule does not apply to IRAs or SEPs.
In other words, if money is transferred from a qualified plan to an IRA, the check is sent directly from the qualified plan to the IRA. In a rollover, the funds are paid to the person who then remits the money to an IRA. A payment to the person, whether or not there is a rollover, is subject to the 20% withholding. Only a direct transfer avoids the withholding tax.
This is a great planning tool when clients have a need for cash and there is no other way to get it.
It has been said that divorce lawyers have the highest number of malpractice claims. One reason may be that while advising their clients on settlement issues, the lawyer may be giving improper financial advice. This is commonly due to the constant changes in tax law and perhaps the fact that the divorce lawyer’s expertise is in the law, not in taxes.