Divorce is commonly seen as one of the most stressful experiences one will ever go through. Along with all of that stress, you are also making financial decisions that will most likely affect the rest of your life and perhaps the lives of your children as well. For that reason, it’s a good idea to get the advice of a Certified Divorce Financial Analyst™ or some other financial professional during your divorce process.
Forgetting the Tax Effect of 401k Money
Let’s say that a couple is getting divorced and they only have two assets. A 401k worth $200,000 and house with $200,000 in equity. In a Kitchen-Table style divorce, where a couple sits at their own kitchen table and figures out their own divorce, it might seem fair for one spouse to take the 401k, and one spouse to take the house. After all, they are both worth $200,000, right? Well, that is rarely the case.
Consider this. If the spouse taking the 401k has not worked in many years, and I’ve often seen clients who have been out of the work-force for over 20 years, if they take the 401k, but it is known that they are going to have to live out of the 401k for a few years while they get themselves back to work, then they are going to have pay income tax on any money that they pull from the 401k. Assuming they pull $50,000/year for expenses, they will pay over $8,000 in taxes each year. Should they bear the burden of all of those taxes? Probably not. If this couple had used a financial advisor during their divorce, it would have become obvious that the two assets were not of equal value.
Now assume for a second that the spouse who took the house was not planning on keeping the house. If they were planning on selling it, they would end up paying a percentage to their agent and perhaps even more to get the house ready to sell. Their net at the end of the day would not be $200,000, but something less.