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  • Home
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  • Financial Services
    • Financial Help
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You are here: Home / Blog / Overlooked Financial Issues During Divorce- Forgetting the Tax Effect of 401k Money

Overlooked Financial Issues During Divorce- Forgetting the Tax Effect of 401k Money

February 24, 2020 By Keith

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.

In a Collaborative Divorce, it’s customary to have a financial person on the team who can calculate the estimated net value of the 401k and the estimated net value of the house and come up with a division of the assets that is fair.

Keith Powell, Certified Financial Planner® and Certified Divorce Financial Analyst​​™​
www.austindivorceplanners.com kpowell@austindivorceplanners.com 512-963-6883

Securities offered through SCF Securities, Inc. • Member FINRA/SIPC • 155 E. Shaw Ave., Suite 102, Fresno, CA 93710 • 800.955.2517 • 559.456.6109 FAX.  Investment advisory services offered through SCF Investment Advisors Inc. SCF Securities, Inc. and Austin Divorce Planners are independently owned and operated.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine what is appropriate for you, consult a qualified professional.

This information is not intended to be a substitute for specific individualized tax advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

Want to Read More?

Overlooked Financial Issues During Divorce- Valuing a Pension
Overlooked Financial Issues During Divorce- Dividing Assets
Overlooked Financial Issues During Divorce- Hiding Assets

Filed Under: Blog

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Reviews

Christy Morley
Christy Morley
2022-06-12
Keith Powell was easy to talk to and he explained things for me to understand easily.
Melissa Girtman
Melissa Girtman
2021-08-04
I found Keith Powell through my divorce attorney and Keith was an amazing resource for me during my settlement negotiations. Keith's role as a Certified Divorce Financial Planner, helped me to evaluate the financial arrangements my husband's attorney was proposing; and feel confident I would be able to support myself and pursue my new divorced life. I am a very visual person and the plan Keith presented enabled me to see how my retirement goals were protected and my budget planning contributed to my success. Highly recommend Keith!
ATX_HEX
ATX_HEX
2021-01-14
I found Keith through Google and his reviews were good, so it made sense to go through a divorce financial planner as a mediator instead of my now ex-wife and I both paying to hire lawyers. Keith was knowledgeable and helpful for the most part, but there were many things I had researched about asset allocations in a divorce he had never even heard of. Additionally Keith and his assistant sometimes took days to return phone calls or texts. The biggest issue I had was the lack of communication and organization. What should have been handled in 2 meetings ended up taking three because Keith failed to tell both my ex-wife and myself all documents needed for our second meeting, so we were forced to attend a third meeting to reach an agreement with our finances and my assets at his going rate of $195/hr. An unnecessary expense had Keith just told us what we needed to bring in the first place for our second meeting.
Josh Tollett
Josh Tollett
2019-08-27
Divorce is even harder if you don't have a good adviser to help you through the process. Highly recommend to help you with your needs.
Kimberly Chapman
Kimberly Chapman
2014-11-13
To Whom it May Concern: I have personally known Keith Powell for the last three years. I can vouch for Keith's honesty and integrity having had the personal benefit of Keith's help within the context of my dissolution in February 2013. In addition I can also vouch for Keith's knowledge of the law, and expertise when it comes to his ability to provide the services for which he is so retained, and the fiduciary responsibilities that he assumes on behalf of his client. I know without a doubt I would not have faired as well in my dissolution without the aid and expert advice of Keith Powell who I now call my friend. Kindest regards, Kimberly Ann Chapman

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