Archives for May 9, 2019

For many people, retirement plan assets make up a meaningful portion of their financial wealth. In a divorce proceeding, retirement plans often present additional challenges to an already difficult process.

Most states treat retirement plan assets as marital property. Therefore, unless you’re operating under a prenuptial agreement, you’re legally entitled to a portion of your spouse’s employer-sponsored retirement plan benefits, and vice versa. Since retirement plans can be of significant value and often come with important tax implications, it’s critical to understand how they are divided in a divorce so that your interests are protected.

I sat down with Casimira Pittman, CPA, senior management at Smith and Howard, to find out more about the division of retirement plan assets in a divorce. She shared the following information with me, to help explain how retirement plan assets are divided in a divorce.

Qualified Domestic Relations Order (QDRO)

According to the IRS, a Qualified Domestic Relations Order (QDRO) is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant. If you receive QDRO benefits from a retirement plan, you are required to report the payments as if you are a plan participant as well as receive a proportionate share of the account basis. In addition, as a former spouse of the employed participant, you can roll over any payments from the plan into another retirement account—for example, an individual retirement account (IRA).

A QDRO is designed to allow you to receive the benefits to which you’re legally entitled. Although your divorce settlement may say you have rights to a portion of your spouse’s retirement plan, the distribution must be done pursuant to a QDRO so as not to disqualify the plan for assigning benefits to a person other than the plan participant. It’s important to note that QDROs only apply to qualified retirement plans that are covered by the Employee Retirement Income Security Act (ERISA), such as defined contribution and defined benefit plans. QDRO’s cannot be used to split IRA assets, however IRA’s can be split under the divorce or separation agreement.

Defined Contribution Plans

A 401(k) is the most common example of a defined contribution plan. Determining the value of a defined contribution plan is relatively straightforward since it has a daily cash value, or balance. A defined contribution plan can be divided however the court deems appropriate with a QDRO.

If you receive payments as an ex-spouse from a 401(k) or other defined contribution plan, typically, you can roll them over to a retirement account without incurring any tax consequences. However, you’re not required to transfer the assets to another retirement account. While most retirement plan distributions prior to age 59 ½ are subject to a 10% penalty tax, distributions made to a former spouse pursuant to a QDRO are generally exempt from this penalty. Still, you’ll have to pay ordinary income taxes on any payments you receive if you choose to spend them.

Defined Benefit Plans

A pension is the primary example of a defined benefit plan. A defined benefit plan tends to be harder to value since instead of having a cash value today, it promises to pay the participating employee a set amount each month at retirement. In addition, any benefits accumulated before marriage or after divorce typically aren’t considered marital property. Therefore, if your spouse has a pension, determining your share of the benefits can be complicated.

Like a defined contribution plan, a defined benefit plan can be divided however the court deems appropriate with a QDRO. In general, three common methods are used to divide pension assets:

Present value/cash out method, in which the ex-spouse receives a lump sum settlement;

Deferred division method, in which no present value is determined, and each spouse is granted a share of benefits if and when they are paid by the plan;

Reserved jurisdiction, in which the court retains the authority to order distributions at some point in the future.

Finally, it’s essential to work with the pension plan administrator to set up survivor benefits. In the event your former spouse dies prior to retirement, you can preserve your rights to receive survivor benefits with a QDRO.

Individual Retirement Accounts (IRAs)

Compared to employer-sponsored qualified retirement plans, IRA assets are much simpler to divide in a divorce. Once the court determines each spouse’s share, you can roll over any payments you receive from your ex-spouse’s IRA to another retirement account without penalty or tax consequences. Should you decide to spend the proceeds instead, you’ll be subject to ordinary income taxes and the 10% premature penalty on early withdrawals will apply.

Dividing retirement plan assets in a divorce can be a complex and lengthy process. While understanding your rights beforehand can ease some anxiety, it’s often best to work with your legal, tax, and financial advisors to ensure an equitable division of assets. Your advisors can also help you implement the court’s decision in a tax-efficient and financially beneficial manner.

If you want to grow your net worth, saving as much of your income as possible is a good start—but it’ll only get you so far.

To truly maximize your income’s potential, you’re going to have to do more than stick it in a savings account. You’re going to need to invest.

This means setting up a traditional IRA or a Roth IRA to help build up your retirement savings. It also means setting up a separate brokerage account to hold any savings that aren’t currently part of your emergency fund (or aren’t being saved for a short-term purchase such as a vacation).

Why you need a brokerage account in addition to your retirement accounts

Why should you consider a brokerage account—that is, an investment account that you can contribute to and withdraw from at will—in addition to your retirement investment accounts? Because your money will grow a lot faster in a brokerage account than it will in a savings account.

Yes, the market could drop and your investment accounts could lose money, which is why it’s not a good idea to invest your emergency fund. It also might not be a good idea to invest money you think you’ll need in the next few years, though that all depends on how much risk you’re comfortable with (and how much money you can afford to lose). Money Under 30 has a good analysis of the potential risks and benefits of investing money you plan to use in two years:

As you recognize, putting your money in anything but an FDIC-insured savings account always involves risk. So you have to ask yourself if the risk of losing some of your money is worth the extra return you could get by investing it. Let’s look at the numbers:

• If you start now with $3,500 and put in $500 a month in the ING account at 0.75 percent, you’ll have about $15,640 in two years.
• If you invested in mostly bonds and some stocks to hope for a return of 4 percent, you’d have about $16,200 in two years. Of course, a 4 percent return is optimistic — you might get closer to 2 percent, and there’s always the chance your investments could be flat, or even down, at the end of the period.

There’s one final consideration: Taxes. Savings interest is taxed at your marginal income tax rate. Any gains on investments you hold longer than one year as well as qualified dividends, are taxed at the lower capital gains rate. Regular dividends and investments you hold for less than one year are taxed at your income rate, as well. The bottom line is there is room to save a bit on your taxes by investing rather than saving.

How to get started with investing

So… how do you get started with investing? CNBC has a great overview, beginning with this reminder that investment accounts are still the best way to build wealth in our current economy:

You can’t save your way to wealth and not everyone can earn their way there. That leaves investing.

If the word “wealth” doesn’t sit well with you, feel free to substitute “net worth” or “financial security” or “enough money to retire.” The point is that investments are often one of the best ways to increase your income, whether you want to become wealthy or whether you just want to set aside enough money to cover a big expense like a wedding or a home.

Are you saving enough for retirement? For a lot of us, it’s hard to say—but we can look at how our savings compare to other people in our age group.

As Investopedia explains:

A June 2018 report from the Transamerica Center for Retirement Studies looked at a nationally representative sample of 6,372 workers, age 18 and up, and broke down their retirement savings by generation. It found that Baby Boomer households had estimated median retirement savings of $164,000 as of 2017, while Generation Xers had $72,000, and Millennials had $37,000.

I’m an “Old Millennial” (born in 1981) and I currently have $90,960.73 in my various retirement accounts—although $3,445.87 of that is in a health savings account, which can technically be used for retirement if I don’t spend it on healthcare first.

The Transamerica study suggests that my retirement savings might be higher than my generation’s average for two reasons: my annual income is over $50,000, and I have a graduate degree. (The more education you have, the more money you are likely to save for retirement—or so the study reports, anyway.)

I’d argue that my retirement savings are higher than average because both my undergraduate and graduate degrees were fully funded, because I have no children and live in a low cost-of-living area, and because I’ve spent the past five years writing about personal finance.

In other words: I’ve had some financial advantages that the average millennial hasn’t.

But enough about me. What about you? Do your retirement savings fall in line with the average? If they’re higher or lower than what other people in your generation are saving, what factors might have contributed to your ability to make retirement contributions?

It kills some people to talk about death.

Some 60% of people say they know very little about death, and they’re almost as likely to get their information about the end of life from movies and TV dramas as they are from medical professionals, according to a new poll by the U.K.-based Academy of Medical Sciences and market research company Ipsos MORI.

Unfortunately, fictionalized versions of death can be misleading, said Lesley Fallowfield, a professor of psychooncology at the University of Sussex. “TV and films rarely ever depict ‘normal’ deaths. For many individuals, death is a gentle, peaceful and pain-free event. We need to demystify death and talk about it more.”

There was a time when Hollywood may have gone too far in the other direction, specializing in its own version of “beautiful death” from movies like “Dark Victory” (1939) starring Bette Davis to “Love Story,” (1970), starring Ali McGraw and Ryan O’Neal. But as the U.K. Guardian recently noted, movies like “Me and Earl and the Dying Girl” (2015) and “The Fault in Our Stars” (2012) have taken a more unflinching look at a difficult subject.

But even convincing the poll participants to talk about death was an uphill battle. A third — 33% — of those polled opted out of answering death-related questions, suggesting perhaps that the conversation remains taboo. The biggest concern (62%) was that a person would be in pain. And 52% of people said they were afraid that the person dying would be scared; 40% were worried that the person would be panicking in their last moments.

Americans are more likely to avoid talking about death in day-to-day life (69%) than people in countries like Japan, Italy and Brazil, according to a separate study from 2017 by The Economist and the Henry J. Kaiser Family Foundation, a nonprofit, private foundation based in Menlo Park, Calif. And people in the U.S. are more likely to want family members and patients to make end-of-life decisions, according to the same study.

Avoiding conversations about death can create a financial burden on the loved ones left behind. If someone dies without a will, their assets are distributed based on each state’s “intestate” laws. Some states give all the assets to the surviving spouse, while others distribute money and assets to the spouse and kids. A lawyer will typically charge between $500 to $1,000, however, you can get one for as little as $75 or make your own online for even less.

Most people (73%) have outstanding debt when they die, according to data from credit bureau Experian EXPGY, +0.35% They die with average unpaid balances of $4,531 on credit cards; $17,11 on auto loans; $14,793 on personal loans; and student loan debt at $25,391 (federal student-loan debt is eligible for cancellation after the borrower dies, but private student-loan companies don’t typically offer that).

Not all debt goes away when a person dies. If your friend or loved one does not have enough assets to cover the cost of some debts, creditors can continue to get paid.

Financial advisers and lawyers are also urging doctors in the U.S. to talk to their patients about death. Medicare started reimbursing health-care professionals for talking about end-of-life wishes with their patients in 2016, MarketWatch reported.

Still, it’s a painful conversation for doctors to have: Just 14% of physicians have billed Medicare for an end-of-life conversation with a patient under the advance-care planning program, which lets patients plan ahead in case something fatal occurs, a poll sponsored by the John A. Hartford Foundation, the California Health Care Foundation and Cambia Health Foundation reported.