Unpacking the True Value of a Dollar in Divorce

Collaborative Professionals use the acronym PEACE to remember the steps in a divorce. Funny, huh, since most divorces are not particularly peaceful. But since one thing affects another, for example, the amount of alimony will affect the amount of child support, we have to approach solving the issues by tackling them in the proper order.

P is for Parenting Plan,
E is for Equitable Distribution,
A is for Alimony,
C is for Child Support and
E is for Everything Else.

The division of your assets and liabilities is the first financial work to be done on the road to divorce. Many people make the mistake of treating all assets the same. Bank accounts, brokerage accounts, retirement accounts, proceeds from home sales, etc.

The common thinking goes, add up all the assets and make sure each person gets half of whatever that number is. Same with the liabilities.

So, the Wife wants all the proceeds from the sale of the marital home, let’s call $250,000 and she proposes that the Husband retain his IRA, also worth $250,000. Even, right?

Not so fast, those dollars sitting in the IRA have not yet been taxed. They were put into the account before tax and will be taxed when the Husband takes them out to use them. That means that his $250,000 is not worth $250,000 but rather $250,000 less the taxes that will be withheld when he withdraws the money.

Let’s say he is a 20% tax bracket at that time. The taxes will reduce the $250,000 by $50,000! On top of that, the Wife will have her $250,000 to use right away but the Husband may not, depending upon his age. He will have to wait until he reaches age 59 and a half before he can access the money without incurring a penalty on top of the taxes.

Don’t get caught in these math mistakes!

Use a neutral financial expert to assist with the many financial decisions that must be made during your divorce.