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Financial assets include cash, savings accounts, checking accounts, Certificates of Deposit, money-market accounts, stocks, bonds, Real Estate Investment Trusts (REIT), mutual funds, and savings
bonds. These assets may be more important to the non-working or lower-income-earning spouse. He or she may need to use these assets to cover some of his or her living expenses.
Remember that not all assets have the same tax consequences. Retirement assets are generally before tax assets. This means that in order to access the money, you have to pay income tax on any distributions you receive. In some cases, you may also have to pay a penalty on the distribution in addition to any income tax that you pay. For example: Mary suggested to Gus, “You keep your retirement assets, valued at $100,000, and I’ll take the money-market account, valued at $100,000.” Gus agreed because it was an equal division of the assets. However, when Gus retires in 2009, he will pay tax on the distributions. So if Gus pays tax at a rate of 25%, then he would end up with only $75,000 versus the $100,000 that Mary received.
In the U.S., there are many different types of retirement assets, including defined benefit plans, defined contribution plans, IRAs, and Roth IRAs. It is important that you determine how defined benefit plans, such as pensions, will be divided between you and your spouse. This is generally spelled out as a percentage of the retirement benefit at the time of the divorce. It is also imperative for the agreement to state if the employee’s spouse will be entitled to survivor’s benefits if the employee dies. It is important to make sure that the non-employee in fact qualifies for survivor benefits; otherwise, he or she may be better off with another asset.
Defined contribution plans include 401(k) plans, profit-sharing plans, simple IRAs, and other types of contributory plans. Generally, these can be divided today, and the non-employee spouse can take the percentage that is awarded and roll it over an IRA or perhaps maintain it as a separate account in the same plan. The agreement should specify the percentage that you and your spouse will receive.
IRAs or Roth IRAs are also easily divisible. Remember that distributions from Roth IRAs will generally not be taxed, while distributions from IRAs will generally be taxed. As a result, $10,000 from a Roth IRA is probably a better asset than $10,000 from an IRA.
Some people will want to divide the pension into two separate pensions: one for each person. This is possible with some pensions but not with others. In any case, it is still important to have the pension valued properly: diving one pension into two is not a way to avoid the cost of a valuation (or to avoid arguing over which value is the right value for the pension).
Federal government pensions qualify for division under the Pension Benefits Division Act (PBDA). This Act provides that the member may transfer to a retirement vehicle for the spouse a portion of the value of the pension. This is known as the Maximum Transferable Amount (MTA).
You should be aware that there is more than one way to value a pension; if the amounts are significant, you should consider having an expert valuation done.
Coming next: Dividing Employee benefits, Appreciation Rights and Restricted Stock.
Karen helps attorneys; mediators, individuals and couples, navigate through the financial morass of divorce and widowhood. Her expertise lies in understanding the special tax and financial issues that can plague divorce and she helps clients get their financial fair share and equitable settlements. She provides financial analysis, projections and solutions so clients can avoid long-term regret over decisions made early on in divorce and widowhood. Karen offers a range of financial, investment and insurance services that address clients’ complete financial picture and long-term needs before, during and after marriage. She is currently writing a book entitled, “To Have and To Hold Onto Your Financial Fair Share: Financial Decision Making When Marriage Ends in Divorce or Death.”