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The Best Way to Divide Retirement Plans

Fri, 2010-11-12 18:21 — Celeste
 
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The Best Way to Divide Retirement Plans

by Ginita Wall, CPA, CFP®, CDFA

 

San Diego divorce attorney, Michele Lowenstein, explains the options available to divide retirement plans in California. San Diego family law attorney, Michele Lowenstein, provides more information on dividing pension plans and social security benefits upon divorce.When dividing retirement plans, as professionals we all try to minimize tax costs, penalties and fees for our clients. Here are some tips for dealing with retirement assets:

1. Since IRAs are not qualified plans, they don't require Qualified Domestic Relations Orders (QDROs). If there are several retirement plans to be divided, save QDRO fees by letting each spouse keep their own plans and equalizing with funds from an IRA. Furnish a copy of the MSA to the IRA custodian, and they can make the transfer to the other spouse's IRA.

2. If your client needs money from the 401(k) proceeds coming their way, advance planning will help avoid penalties. By providing for the withdrawal within the QDRO, your client can avoid the 10% federal and 2.5% California early withdrawal penalties, although they will still owe income taxes. But beware: if your client later decides they didn't withdraw enough, once the funds are transferred to an IRA it is too late to withdraw penalty-free.

3. To buy an ex-spouse out of the house, your client can borrow from his 401(k) plan to obtain funds tax- and penalty-free. He can pay the loan back at low interest rates over time, and the repayment will replenish his 401(k). This tactic shouldn't be used to equalize tax-deferred retirement plans, however, since the participant will be giving tax-free funds to his ex in exchange for money on which he'll eventually be taxed.

4. Clients receiving retirement funds in a divorce can now roll those funds directly into their own Roth IRAs, but that doesn't mean they should.  With the new direct rollover rules, clients no longer have to roll the funds into a traditional IRA and then convert to a Roth IRA. But beware the tax consequences of a direct rollover into a Roth: it is considered a distribution of the plan balance, and is fully taxable.

5. To keep the house, your non-employed client may be tempted to let her working spouse take the lion's share of the retirement assets. Though that solves an immediate problem, it may backfire in the long run. Since she won't have the same opportunity to save for retirement from ongoing wages, in the end she'll end up house-rich and retirement-income-poor.

 

There are additional complexities involved in all of these tactics. If your clients want to explore strategies regarding the division of retirement accounts, Ginita can help. Give her a call at 858-792-0524 or email her.

 

Traditional vs. Transitional Planning

by Candace Bahr, CEA, CDFA

 

When a financial planner works with conventional clients who are emotionally stable and have traditional life goals, the planner's role is to organize information, develop a plan, then implement and monitor the plan. Divorce is nothing like that. When clients go through divorce, their lives are in flux, and the usual "organize, plan, act" approach isn't enough. A traditional client faces choices about spending vs. saving, conservative vs. aggressive investing, and tax strategy decisions. A divorcing client has to contend with all of that while also dealing with the disorientation of the transition experience.

As an investment specialist dealing with clients going through divorce and other transitions, I serve as a facilitator of change. Over the years, I have developed an open scenario-testing process to help clients explore their new financial realities and boundaries and begin to see what is and is not possible.

Transitions are tricky, but I can help. By taking time getting to know the clients, their values and their dreams, I help them navigate the shoals of divorce, from determining what decisions must be made early on and what can be delayed until they have become more emotionally grounded, to investing the assets that they receive through the divorce settlement.

 

To find out more about Bahr Investment Group and our investment management services, we encourage you or your clients to call our office manager, Denise Raines, at (800) 200-8198, or email me. 

What is a CDFA?
A Certified Divorce Financial Analyst (CDFA) is a member of the Institute for Divorce Financial Analysts who uses his or her knowledge of tax law, asset distribution, and short- and long-term financial planning to help resolve the financial intricacies of divorce. The CDFA goes through a four-step training program and exam to become skilled at analyzing and providing expertise on the financial issues of divorce.

Copyright 2010 by Ginita Wall and Candace Bahr. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual.
Ginita Wall and Candace Bahr have separate practices. Ginita is not affiliated with LPL Financial nor is Candace affiliated with Ginita's CPA practice.

 
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