Archives for April 29, 2019

Separating from your spouse can mean suffering a heavy emotional and financial toll. You may be wondering how to protect your 401(k) in a divorce. Fortunately, there are plenty of ways you can protect your retirement savings during a divorce. As you explore your options, you might also want to find a financial advisor who can guide you through protecting your assets a divorce.

Devise a Clear Divorce Decree

You and your ex-spouse can decide how to split up certain retirement plans such as a 401(k) in a divorce along with other financial assets if applicable. Of course, agreement rarely comes up during a divorce. That’s why it’s best to seek professional legal and financial help to make sure you come up with a clean divorce agreement that won’t leave you open to loopholes that can suck your hard-earned cash.

Know Your Plan Rules and Regulations

Divvying up retirement accounts in a divorce is different from splitting other types of assets, because specific tax laws and regulations governing these plans. The court can’t simply order you to split retirement accounts in half.

In any case, your summary plan description would give you some details as to how your plan would be divided in a divorce. If you receive retirement benefits from work, you can get it from your employer. Otherwise, you can contact your plan administrator.

But, we’ll cover the basics of how you can protect specific retirement plans below. We’ll also cover other steps you can take to shield your entire financial picture.

Protecting Your 401(k) and Assets in a Divorce

Before defined contribution (DC) plans such as 401(k)s get split, the court must issue a qualified domestic relations order (QDRO). You can get a blank copy of this from your plan administrator. In most instances, your attorney drafts the QDRO before sending it to the divorce Court.

Once a judge signs it, the QDRO makes the asset split official, and it allows plan administrators to enforce it. However, these administrators must first accept the QDRO. This applies to all plans governed under the Employee Retirement Income Security Act (ERISA) of 1974. These include the following:

• 401(k) plans
• 403(b) plans
• Thrift Savings Plan (TSP)

The framework varies based on different factors like plan type and state law, but the typical scenario looks like this. The judge analyzes “marital property” and “separate property.” In most cases, money contributed toward the plan after the official date of marriage as well as the earnings it generates is considered marital property. That’s the portion the judge would split.

Fortunately, however, the QDRO allows you to roll over your portion into your own qualified plan penalty and tax-free. You should continue contributing to this plan or roll it over to a Roth IRA via a trustee-to-trustee transfer.

Roth IRAs allow you to take tax-free distributions if you’re at least 59-years-old and have had the account open for at least five years. This makes sense if you expect to drop into a lower tax bracket as you get closer to retirement.

TSP plans for employees of the federal government and armed services follow slightly different rules. The divorce decree must clearly detail how much of the account balance each spouse is entitled to in order to meet QDRO rules.

How to Protect Your IRA in a Divorce

You don’t need a QDRO to split Individual retirement accounts (IRAs) and Roth IRAs. If you already had one or more of these accounts during your divorce, the court would likely split under the “incident to divorce” provision in the tax code This allows the balance to be split among both ex-spouses tax-free within a year following the official divorce date.

In any case, you should continue to invest whatever portion of your retirement plan you keep. If you still have a long way to go before retirement, this money will continue working for you buy growing in the market. If you’re closer to retirement, consider buying an annuity.

Protecting Your Pension Assets

According to most state laws, pension assets that were in the plan during the marriage are considered joint or marital property. So the court would typically split distributions of these assets in half. However, you keep the portion you contributed and earned before the marriage. So if you and your employer contributed toward the plan for 10 years before you got married, that money remains yours.

However, pension plans work differently across states and you should be aware of how yours functions. Pay attention to how the plan makes distributions. You usually can choose between a lump-sum payment or a monthly annuity payment.

If your plan allows a joint-life payout, your ex would receive payments even after your death. On the other hand, your ex-spouse is entitled to the option of your choice with a single-life payout.

Several pensions also allow survivor benefits. The framework of these can get very complex in a divorce proceeding. For instance, some states allow the ex-nonworking spouse to keep his or her survivor’s benefit even after divorce. So you should consult your employer to learn all about the rules of your particular pension. A financial advisor can then help guide you through the right moves to make for your plan.

Negotiate

As you can see splitting retirement assets can be costly and time consuming for both parties in a divorce. Keep in mind we haven’t covered legal fees. And plan administrators typically charge fees for QDROs as well. So if you and your spouse are relatively the same age and have similar retirement account balances, it may be best to agree that each walks away with what’s already theirs.

If there’s a wide gap, you may need to negotiate. Consider trading in other assets of equal or greater value than your ex-spouse’s portion of your retirement savings. Maybe you can transfer some of those funds from other accounts like a brokerage one. Remember, such accounts don’t enjoy the same tax treatment as your 401(k) or Roth IRA. And it can be easier to regain that loss if you’re still working. It’ll be harder to make it up when the pay checks stop rolling in. Or if you’re living in a mortgage-free home, you may want to hand over the keys to your ex-spouse in exchange for leaving your hefty retirement benefits intact.

When it comes to evaluating your assets and deciding which ones you can put on the negotiating table, a financial advisor would come in handy.

Close Your Joint Accounts

Early on in the divorce process, you will want to close any joint accounts you and your spouse share. This includes savings and checking accounts, along with credit cards or any other debt accounts you may share. Unfortunately, not all divorces are amicable, and one of the best ways to protect your finances is to begin ensuring your spouse does not have access to them.

With that said, you should move forward as fast as you can with the divorce proceedings. If you can be entitled to a hefty share of your ex-spouse’s 401(k) or IRA, your ex may borrow against it.

Bottom Line

Divorce can be detrimental to your finances. Luckily, there are ways to repair your credit and protect your personal assets and retirement savings. Following the steps above and getting help from experienced professionals can help you move on from a divorce with your savings intact.

Tips for Retirement

• No matter what type of retirement plan you prefer, you should open one as soon as possible. To help you narrow down your choices, we published a study on the best Roth IRA accounts around. You can typically open these at banks and other financial institutions.
• Divorce is an emotional roller coaster, but your finances don’t need to go off the rails. Work with a financial advisor, who can help you protect your hard-earned assets. We can help you find one in your area with our financial advisor matching tool. Simply answer a few questions about your goals and you’d be linked with up to three advisors. You can then review their credentials and set up interviews before working with one.

When it comes to teaching kids about money, the super rich are different from average Americans.

But it’s not only about the amount of wealth they have.

It’s also because money is something that many of them would rather not talk about, said Rich Morris, co-author of the book “Kids, Wealth and Consequences.”

“For the most part, money is a taboo subject in this society and wealthy people do not do all the things they need to do,” he said.

They may also turn to financial professionals to do the job for them.

Arne Boudewyn, who leads the Institute for Family Culture at Abbot Downing, said his group is often asked to interview clients’ adolescent and young children to “find out what’s on their minds” or to educate them without the influence of family dynamics.

The end goal is to make sure kids are learning about how to be responsible and have a healthy attitude about money.

“Parenting is hard no matter what,” Boudewyn said. “Add significant wealth, there are some things you have to think about.”

On top of that, many parents think their children are learning personal finance in school — when in reality, that’s not usually the case. Only 17 states require that high school students take a personal finance class, according to a 2018 survey by the Council for Economic Education.

“There is a big disconnect, and that extends to the affluent and ultra-high-net-worth people,” Boudewyn pointed out. “People think more is getting passed along to their kids than actually is.”

“It requires more intention than ever and really an active action plan, a proactive plan,” he added.

That means implementing a strategy that starts when your kids are young. And it isn’t always just applicable to the wealthy — everyday Americans can also apply many of the strategies in their financial teachings.

The big picture

The No. 1 thing wealthy parents have to do is talk to their kids about money — how much wealth the family has, their plans, how they built their wealth and whether they plan on leaving the kids anything in their will or if their children are going to be on their own, said Morris.

It’s not just one single conversation, he added: “It’s conversations often and at every age and every maturity.”

Ages 5-9

Parents should start with teaching a basic understanding about money and communicating what their family’s values are when it comes wealth.

That can be explaining what it costs to buy something and what the family’s annual spend is, say, on something like school activities.

Boudewyn suggests helping younger kids with things such as counting money, talking about the history of money and giving them a tour of the state’s Federal Reserve bank or any local bank. Also, he suggests having them divide their allowance into savings, spending and giving.

Even basic investing principles can be introduced — such as explaining what a stock is and what it means to have equity in something, he said.

Ages 10-14

At this age, it’s a good idea to talk about budgeting basics, said Boudewyn. Children can be introduced to banking and taught how to manage their own financial lives.

Taking a little bit of a deeper dive into investing basics is also a good idea. You can give your kids a small amount of money to invest, or you can create a mock investment account that they can build and manage over time, he said.

Ages 15-17

The core topics in the later teen years should be around budget management.

“They should be getting ready for life on the road,” Boudewyn said.

Whether they are going to leave home for college or a job, teens should start to understand about the dos and don’ts of renting an apartment, buying a car and handling a roommate situation. They should also learn how to manage their money, know the pros and cons of credit cards and have an understanding of their credit rating.

Ages 18-21

As your children turn into young adults, they should start to understand personal investing and understand their risk tolerance. They should also set personal financial goals.

That includes “really thinking about how can I start to set aside money for taking care of myself in the future,” said Boudewyn.

Young adults can also use the family enterprise to start learning about wealth opportunities in the context of running a business, he added. That can mean pulling them into the business meetings and giving them an overview of the enterprise.

Ages 22 and up

At this age, your offspring may be thinking about whether they should rent or buy a home.

If they are buying, they need to understand mortgages and how they want to borrow and how they can preserve their cash. They should also start to review their credit report and think about their experience with debt management.

For the children of the wealthy, this is also an opportunity to give back. Because their family’s wealth is assured for the next several generations, many like to look at how they can improve the world. They can also take a job at the family business, Boudewyn said.

The bottom line

Don’t become overwhelmed when thinking about taking on a financial literacy program with your kids, said Boudewyn.

“It’s finding teachable moments every day,” he said. “You can really help children make choices, understand the value of a dollar, understand risk and reward.”

“There are so many ways you can support kids.”

Parents are responsible for taking care of their children, and that means emotionally, physically — and financially Opens a New Window. . But how old is too old to be receiving money Opens a New Window. from mom and dad?

A new Bankrate survey on financial independence looked into the average age Americans think individuals should start paying for their own bills, including car payments, cell phone bills and student loans.

The journey to independence has changed in recent years as “helicopter parenting” and prolonged education continue to create more co-dependent financial relationships between parents and children. But the data from this new survey reveals an alarming trend: 50 percent of Americans say they have sacrificed or are sacrificing their own retirement savings in order to help their adult children financially.

The higher the bill, the longer parents are willing to foot it

Bankrate asked Americans at what age they thought a person should start paying for their bills. Most of the results dovetailed the traditional mindset that 18 is the golden age of adulthood — except when it came to big-ticket items.

Car payments and insurance, cell phone bills, subscription services, travel costs and credit card bills all had the majority of total respondents saying that individuals between 18 to 19 years old should be paying for these bills themselves.

For example, the average age respondents expect individuals to start paying for their cell phone bill was 19 years old. Younger generations, or Gen Z and millennials, both said that age should be 20; Gen X and the silent generation said 19, while Boomers said 18.

All generations agreed the average age someone should start paying for their subscription services is 20 years old.

As the bill gets more expensive, however, the average age expectation starts to increase and vary by generation.

Millennials, Gen X and the silent generation agreed that car payments should be paid at an average age of 20, whereas Gen Z said 21 and Boomers said 19.

Overall, respondents said individuals aged 23 should begin paying down their own student loans. One might assume wealthier households are more willing to help pay off massive student loan debt, but that wasn’t the case. Respondents with household incomes under $30,000 said the average age for individuals to start paying their own student loans was 24; households with incomes from $50,000 to over $80,000 said that age should be around 23.

Housing costs also had a higher average age overall, at 21 years old. Gen Z and millennials agreed the average age to start paying rent or a mortgage was 22, whereas Boomers, Gen X and the Silent Generation all said 21.

The highest age of them all? It’s for paying health insurance. Overall, respondents reported 23 as the average age individuals should start paying for their own premiums. Millennials, Gen X and Boomers all said that number should be 23; Gen Z pushed to 24. The Silent Generation said 22.

Putting retirement at risk to help their kids

The most alarming finding of the survey isn’t that parents are helping their adult children — it’s that the majority of them say that helping is hurting their financial futures.

In total, 50 percent of respondents say they have sacrificed or are sacrificing their own retirement savings Opens a New Window. in order to help their adult children financially. Half of Gen X and Boomer respondents said the same.

The retirement crisis in America is an ongoing worry for Americans. As companies have shifted away from offering traditional pension plans to employees, much of the responsibility in planning for financial life after work now relies heavily on individuals. Unfortunately, some are struggling to keep up.

A March 2019 Bankrate survey found that more than 1 in 5 working Americans aren’t saving any money for retirement, emergencies or other financial goals. Major barriers as to why respondents said they weren’t saving included not making enough money and large debt payments.

As some Americans reach retirement age and realize they may not have saved enough, they find themselves being forced to work longer than planned. In 2017, the labor force of Americans ages 55 and up accounted for about 23 percent of the average annual labor force. The Bureau of Labor Statistics that by 2024, that figure will increase to almost 25 percent.

For a country where many people are already struggling to navigate their financial futures, the data isn’t encouraging.

Why is this happening?

Some may argue that financially helping adult children may be turning them “soft.” So why are people doing it?

Mark Hamrick, Bankrate’s senior economic analyst, says there are a variety of reasons parents might feel compelled to help their adult children financially — and they don’t all have to do with spoiling or enabling them.

“This is, for better and worse, the new normal because of the evolving approaches parents have taken to raising their children,” Hamrick says. “And it’s a result of some of the ongoing financial challenges that many families face, some of which were caused by the financial crisis and the Great Recession.”

Some of those challenges include a lack of substantial wage growth, according to Hamrick. Although recent employment reports show gains, he describes that as a “relatively modern phenomenon.”

“It’s doing very little to recapture the lost gains in the earlier economic expansion that’s approaching the 10 year anniversary,” Hamrick says.

Other culprits include the rising cost of education and the rising popularity of higher degrees.

“This is the ironic, unintended expense of people staying in school longer,” Hamrick says. “The way young people come of age has changed somewhat over the past 50 years or even longer — there’s no longer a sense of immediate need for young people to enter the workforce, even on a part-time basis.”

And when you’re not working, you can’t pay the bills — that’s where Mom and Dad come in.

How parents can set healthy financial boundaries with their children
Although parents might want to help their adult children out by footing their bills, some experts say it might do more harm than good.

Dr. Laura Dabney, a psychiatrist specializing in interpersonal relationships, says parents who are sacrificing their financial futures for their adult children should reevaluate their assistance.

The conversation about cutting off financial assistance to children, Dabney admits, can be intimidating. Parents who have been providing financial safety nets for their child might worry about how discontinuing the aid might be received. Adult children who have been dependent upon the money might feel as though they are being treated unfairly.

But the longer the conversation is delayed, Dabney says, the more likely it becomes for resentment to start building from both parties, especially from the parents if the financial assistance is jeopardizing their retirement plans.

“You have to decide what works best for you and then present that,” Dabney says. “Start with being honest about that. And then, listen to the child — and maybe come up with a compromise. Take the two wants and needs from both sides and come up with a plan that works for everybody so there’s no resentment that eventually gets in the way.”

Dabney adds that overall, prolonging financial support for adult children isn’t helpful — no matter how much a parent might think it is.

“That thrill you get of stepping into adulthood — whenever you do that for your child, you’re robbing them of that great joy of figuring out and doing something on their own,” Dabney says. “It can be hurtful for those children for you to be ‘helping’ that much.”

TV commercials label reverse mortgages simple fixes for elderly homeowners needing cash – a financial easy button.

Sorry, there is no such thing.

Yes, reverse mortgages can be attractive. Folks older than 62 can unlock cash from their home without selling. They can simply draw monthly income, a line of credit or lump sum from their home equity, with no repayment until the home is no longer their primary residence. Staying current requires covering property taxes, homeowners insurance and maintenance.

But be careful. Read the fine print. This isn’t money you lend yourself. It’s a loan using your home equity as collateral. That means interest, typically at a high rate, plus other fees and costs. Worse than paying that interest monthly, it compounds, magnifying what you owe. When you sell, you repay the principal plus all compounded interest.

Elderly retirees need their finances to be simple, clear and available until they die. Reverse mortgages’ ballooning costs can cut against those basic needs.

Reverse mortgage calculators show interest’s huge impact. Pretend you did one borrowing $2,000 per month for 10 years – $240,000 in total. At a 4.5% interest rate, your total due after 10 years would $303,530 – before fees. That’s $63,530 in interest alone. Bump it to 20 years of payments and your final bill is $779,160 – $480,000 in principal plus $299,160 in interest. Thirty years? You owe $1,524,468. Less than half of that, $720,000, is your principal. The majority is interest. The longer, the uglier – until your home’s entire value is the lender’s.

These loan amounts aren’t realistic for everyone. They’re illustrative, showing the key risk: underestimating your life expectancy, living far longer than you anticipate, and ending up aged and broke, unable to meet late-life health expenses. If you’re in great health with a good family history, you could live into your 90s or beyond. Planning for a longer life is key to not exhausting your money.

Reverse mortgages often do the opposite, with perverse incentives. The longer you live, the bigger the lender wins, while your compounding interest burden balloons. Do you really want to be cash-strapped and in debt while trying to fund assisted living or other late-life care?

Some disagree, arguing reverse mortgages can insure against depleting your savings before you die, working alongside an investment portfolio. They can. This view rightly considers folks’ assets in totality, rather than in buckets, avoiding a common error.

But it requires the elderly to invest well. Are you a strong investor? Will you be? Are you willing to risk being forced to sell your house late in life to cover a ginormous compounded interest debt, hoping there is enough left to live off of? At an age when most people need simplicity and ease, this seems unwise.

Beware products charging big fees for something you can do easily with cheaper, more simple investments. If you’re younger, save now and invest in your 401(k), reaping compound growth’s rewards rather than having them work against you. Stay invested throughout retirement without excessive binge-type withdrawals, and you should readily cover normal late-life expenses.