Are you considering a divorce or perhaps going through a separation and anxiously anticipating what comes next? Divorce is an emotionally challenging and financially complex experience. Naturally, the well-being of both your children and you take precedence, making it crucial for you to take proactive measures to safeguard your assets and strategize for the future. It is essential to carefully consider preparatory measures and financial strategies, so that you have everything in order before embarking on the lengthy legal process.
Women tend to experience a significant drop in income after a divorce, especially if they were not the primary breadwinners in the marriage. This can be due to a variety of factors such as taking time off work to raise children, earning lower wages than their male counterparts, and being awarded less spousal and child support than they may need.
If you find yourself in this situation or considering divorce, we have put together a few financial tips to help you navigate this difficult time. We, at Anderman Wealth Partners, are here for you and happy to answer any questions that may arise.
Divorce Planning for Retirement:
How will dividing retirement accounts impact my finances?
When dividing retirement accounts during a divorce, there are significant implications for your overall retirement savings and taxes that you need to be aware of. It's essential to understand the potential effects of making informed decisions during the divorce settlement process.
Impact on Retirement Savings:
- Reduced Retirement Nest Egg: Dividing retirement accounts means that a portion of your savings will be allocated to your soon-to-be ex-spouse. As a result, your overall retirement nest egg may be reduced, potentially affecting your financial security in retirement.
- Loss of Investment Growth: Splitting retirement accounts may also mean losing the opportunity for investment growth on the portion allocated to your former spouse. Over time, this lost growth can have a substantial impact on the overall value of your retirement savings.
- Early Withdrawal Penalties: In some cases, you may incur early withdrawal penalties if retirement assets are withdrawn or transferred prematurely as part of the divorce settlement. These penalties can erode a significant portion of your savings, leaving you with less money for retirement.
- Need for Adjusted Contributions: After divorce, you may need to adjust your retirement contributions to compensate for the reduced savings or changes in your financial situation. This may require increasing your contributions to stay on track with your retirement goals.
Impact on Taxes:
- Taxable Distributions: Depending on the type of retirement account, withdrawals made during the divorce process may be subject to income tax. This can result in a higher tax bill and further reduce the overall value of the retirement assets.
- Taxation on Retirement Income: After divorce, the portion of retirement assets received by your ex-spouse may be taxable when they start taking distributions. This means they may need to pay taxes on the income generated from their share of the retirement accounts.
- Changes in Tax Filing Status: Your tax filing status will likely change after the divorce is finalized, which can impact your overall tax liability. You may need to file as a single individual or head of household, and this change can influence your tax deductions and credits.
- Division of Retirement Accounts: The division of specific retirement accounts, such as traditional IRAs or 401(k)s, requires careful attention to tax implications. A Qualified Domestic Relations Order (QDRO) is often used for tax-efficient transfers between spouses.
It is important for women going through a divorce to seek professional advice and support to help them navigate the financial challenges they may face. This could include working with a financial planner, a lawyer, or a therapist. By taking proactive steps to protect your financial well-being, women can emerge from divorce with a greater sense of control over their lives and their finances. Give us a call today to see how we can help you take back your financial freedom.
*Employees who withdraw funds in a 401(k) plan before age 59½ may have to pay a 10 percent tax on any withdrawals, in addition to any regular income tax.
*Retirement plan withdrawals may be subject to taxation and penalties when withdrawn early.
*Investments are subject to market risks including the potential loss of principal invested.