Wednesday, March 12, 2008

Retirement Planning and Divorce, part two

It is commonly assumed, based on Census Bureau statistics, the about half of all marriages will end in divorce. Even more shocking, 60% of those divorces will take place in the first ten years of marriage. How those couples part with what they have accumulated, even in a brief time is no easy task. Even those that choose to part on good terms, often overlook numerous financial implications.

In the short-term, couples look at what they have accumulated in terms of what they can see. Dividing a house and similar possessions of value require only a simple appraisal and the decision of how to liquidate the property or to provide the ex-spouse with an adequate reimbursement.

But there are several things that should be considered when it comes to retirement planning that are often overlooked – even in the short-term.

The possibility that there are not only insurance policies but also retirement plans with designated beneficiaries can come as a surprise. That surprise accompanies, in many instances, an unexpected financial shock. If you have negotiated survivor’s benefits during a divorce, be sure that your attorney has filed the requisite Qualified Domestic Relations Order or QRDO. Just because you have legal claim over benefits due on pension plans, profit-sharing, annuities, or 401(k)s, without the QRDO, the state may make a distinction between the surviving spouse and the surviving ex-spouse.

While the splitting of property in the shorter marriage is relatively straightforward, how the division is done for longer-term marriages is not so easy. Consider the equity in your home. Generally, this is not taxable (up to the first $250,000 for a single person) whereas, the proceeds from a 401(k) are fully taxable. Only the principle of a Roth IRA or Roth 401(k) is not but any interest gained is.

Any negotiated benefits, such as receiving half of what the pension or 401(k) is worth should be checked and double-checked. Payments from a defined benefit plan, such as a pension, are usually made based on actuarial tables. These guesstimates normally assume that a woman will live longer than a man. This calculation will make what a woman has due seem like less than her ex-spouse might receive. These types of payments may also be subject to human error.

The immediate financial ramifications and emotional toll of divorce can be difficult. But making sure that your future is not jeopardized as a result is doubly important.

Part one can be found here

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