Divorce comes with financial concerns. One common question that arises is whether divorce will lead to the loss of retirement savings. While there is no one-size-fits-all answer, it’s essential to understand how divorce can impact retirement accounts. The impact of divorce on retirement savings depends on various factors, such as age, the duration of the marriage, and the amount accumulated in the retirement account.
Younger Couples and Shorter Marriages
If you and your spouse are relatively young and have been married for a short period, the impact on retirement savings might be minimal. You will have the advantage of time, allowing you to continue contributing to your retirement accounts and to make up for any potential losses as a result. Consulting a financial advisor and creating a budget can provide a roadmap to ease concerns and ensure continued savings for retirement.
Older Couples and Longer Marriages
On the other hand, if you and your spouse couple have been married for a significant period, say 30 years or more, and you have amassed substantial retirement savings, the retirement account may be subject to division. Assets acquired during marriage are typically considered community property. If you have built a substantial retirement account over the years, it may be divided during the divorce proceedings. It is important to note that not all assets are subject to division, and other assets can be awarded instead.
While the idea of dividing retirement savings can be unsettling, it’s important to remember that divorce does not necessarily mean the destruction of your retirement account. There are different methods of negotiation and settlement in divorce proceedings. Some processes are driven by attorneys and judges, while others are more client-driven, facilitating reasonable discussions between spouses to preserve their retirement savings to the greatest extent possible.
One potential option that may arise during negotiations is trading equity in the house for retirement savings on a one-to-one basis. However, it’s crucial to consider the tax implications of different assets. For instance, a traditional 401(k) or IRA is subject to tax upon distribution, whereas a Roth IRA is not. Therefore, the taxable nature of retirement accounts should be factored in when assessing their value in comparison to other assets like home equity. Seeking professional advice, especially from a certified public accountant (CPA) who specializes in divorce matters, can help ensure a thorough understanding of tax implications and make informed decisions.
Divorce does not automatically result in the loss of retirement savings. The impact on retirement accounts varies depending on several factors. Seeking professional advice, whether from financial advisors, CPAs, or other experts, is crucial to protect your financial interests during divorce proceedings. Remember that while the process may be challenging, with the right guidance, you can navigate divorce and preserve your retirement savings for a secure future.
Since 1985, Heberger and Company has been serving the accounting needs for Fresno, California, and the surrounding area. We are available for financial services including collaborative divorce, litigation support, business valuation and tax and compliance issues.
To schedule a consultation please call us at (559) 227-9772. Our office is located at 5090 North Fruit Ave. Suite 102 Fresno, CA. 93711. Our website is HebergerCPA.com