As more and more couples get divorced in midlife, more and more people are being faced with concerns about how this divorce will affect their retirement plans. According to an ING U.S. study, divorcees are much more apprehensive about affording retirement than are married couples. The study also found that women who divorced ended up with $34,000 less than divorced men did in retirement funds. Women tend to be more anxious about being able to retire at all. Men, on the other hand, wonder if they will have to wait longer to retire, especially if they have alimony or other support payments to meet. Whatever your concerns, there are ways to prepare for retirement, even in the face of divorce.
For one thing, when it comes to asset division, many think that getting the house is more important than other financial assets. While this may be the case sometimes, it is important to remember that a house will demand continual expenses, and you are likely to be hit by surprise costs. If you want to sell your house to afford retirement, you may not be able to make enough from the sale, or make anything at all if the value of your house has dropped substantially. A house can be more of a liability than an asset. Retirement funds, however, may provide more financial security. Make sure you also consider what tax season will look like if you get the house, or if you get retirement funds.
In regards to tax season, it is important to understand that retirement accounts are not all equal. For example, a 401(k) is a pre-tax account, which means that when you pull the money out at retirement, you will be hit with taxes. Roth IRAs, however, have already been taxed, so when it comes time to retire, you will not be taxed when you withdraw the money. So in a divorce, if both a 401(k) and a Roth IRA are up for grabs, and they both carry essentially the same amount, it is important to remember that the Roth IRA will end up being worth more.
Another mistake to keep from committing is automatically choosing to roll your ex's retirement money into an IRA. If you ever need to withdraw the money, to meet support payments for example, then you will be slapped with a 10 percent tax penalty. If you anticipate having to use some of your ex's funds for divorce costs, then if you are younger than 59 ½ years old, you may be able to withdraw money—once—without getting hit with the penalty. Your ex must have had the funds from a qualified domestic relations order (QDRO). If you are able to do it, then you may want to immediately withdraw money instead of rolling it over.
At the same time, you cannot afford to withdraw too much. Evading the tax penalty is all good and well, but that money exists to fund your retirement. Divorce is a time where you really need to nail down your financial picture. You will need to calculate how much money it would take to live off your retirement funds for 2 to 3 decades. In order to help yourself out in the future then, be sure to not take too much out of the funds you will need later on. Only withdraw what you need.
Of course, all these things are easier said than done. Divorce can be an emotionally trying time, but with help, you can be able to successfully prepare for the next steps in life. With a Raleigh divorce lawyer, you can be prepared for whatever a divorce can throw your way. Contact Hopper Law Office, PLLC today to learn what we can do for you.