How to Use Retirement Assets in Divorce Negotiations
and How the SECURE and CARES Acts Changed the Conversation.
Marriage assumes that all assets are held jointly, whether the account is in your name or that of your spouse. You spent time thinking about and planning your future together. You invested money in tax-deferred accounts either individually or with your employer and probably created projections on what those accounts would be worth at your target retirement age. The intention was that these accounts would generate income for both of you. The framework of an estate plan might have been discussed and the transfer of assets to your children or loved ones was considered.
Now you are getting divorced and need to separate those assets and rethink your retirement plans. One of the first questions usually is “Am I entitled to a portion of my spouse’s retirement plan?” The simple answer is yes; the challenge is figuring out what your portion may be and how the two of you can afford to retire as uncoupled individuals.
This was a complicated enough situation to navigate. Then Congress passed, and the President signed, the SECURE (Setting Every Community Up for Retirement Enhancement) Act in December 2019 and that brought many changes to the American retirement system. These changes effect anyone who has money in an IRA (Traditional, Simple, SEP or Inherited) or 401(k), for example. The first thing you need to know is that the starting age for mandatory distributions has been increased to 72 years old. This accelerates the payout time frame for the owner of the IRA. Additionally, individuals are no longer prohibited from continuing to contribute to their IRA accounts past age 70, rather, they can continue until age 72. Issues of taxation of these assets were also affected by the SECURE Act legislation with opportunities for tax-free distributions now available with Roth IRA rollover planning. This creates opportunities for additional estate planning and wealth transfer to the next generation. Because retirement accounts are often the largest assets that individuals own, other than the marital residence, planning for equitable distribution AND future income generation is crucial during divorce negotiations.
Similarly, the more recent legislation known as the CARES (Coronavirus Aid, Relief and Economic Security) Act created further changes to retirement accounts. While these may be temporary, it is likely that similar measures will be taken in future crisis situations. The most important change that went into place was the suspension of RMD’s or Required Minimum Distributions for individuals who own IRA (Traditional, Simple, SEP) accounts. Any income that has been calculated into a future financial plan needs to be considered when discussing separation of assets.
The Collaborative Process is ideally suited to handle these concerns. Your Collaborative team, which consists of two attorneys, one family support specialist and one financial neutral, each an expert in their field, can assist you and your spouse in creating a roadmap for you and your family, before, during and after your divorce is final. Keeping the proceedings out of the court system allows you and your team to think “outside the box” and create a settlement and plan that is unique to you and for your family’s needs.
For more information about changes to retirement plans or the Collaborative Process please visit www.licdp.com. A list of collaboratively trained lawyers, financial neutrals and family support specialists is available. Any of the professionals are happy to answer your questions and concerns.
Written by:
Donna LaScala, RFC, CDFA