The importance of looking after your assets during divorce — II

Last week, our blog discussed how even though a person might want to resolve their divorce as soon as possible in order to get started on the next chapter of their life, it is nevertheless important for them to remain vigilant during the course of settlement negotiations.

That’s because any failure to do so could result in unforeseen and significant consequences further down the road, particularly when it comes to the always important issue of finances.

In today’s post, we’ll examine another crucial money mistake that divorcing spouses can make if they are not careful. 

Assets and tax considerations

This issue typically comes into play when couples must decide how they are going to divide high-value assets like homes, art collections, retirement accounts, etc.

To illustrate, a divorcing spouse might see that their retirement accounts have similar dollar values and make a haphazard decision regarding which one they would like to acquire, thinking the two accounts are largely the same concerning both their overall value and potential for growth.

This approach, however, is not all it’s cracked up to be.

Consider a Roth IRA valued at $50,000 and a 401(k) valued at $50,000. Here, the Roth IRA is funded with what are known as after-tax dollars, meaning all growth and distributions to the investor will be tax-free. The 401(k), however, is funded with pre-tax dollars, meaning that taxes will be collected on the amount contributed and on the growth of the investment when any distribution is made to the investor.

Furthermore, those who withdraw funds from non-Roth retirement accounts prior to age 59-and-a-half will have to pay income taxes, as well as a possible 10 percent tax penalty.

What this means is that the $50,000 Roth IRA is somewhat more valuable as its future worth won’t be reduced by taxes to such a degree.

Accordingly, divorcing spouses will want to pay very close attention to how future taxes can affect the overall value of the assets they are poised to secure.

If you would like to learn more about divorce, property division or related legal matters, consider speaking with an experienced legal professional to learn more about your rights and options moving forward.

Source: Marketwatch, “Divorce? The 6 worst money mistakes,” Leslie Thompson, Sept. 23, 2014