Divorce is a trying process, and it’s one that approximately 1.2 million married couples go through annually. Beyond the mental and emotional stress, divorce can significantly complicate finances, especially when it comes to the retirements of the parties.
The average cost of a divorce during 2016 was $15,000, but the price of the process can vary widely based on the amicability or hostility between the parties, whether or not there are children involved, the nature of the finances in dispute and the amount of legal fees. Many parties are willing to take drastic steps to offset the cost of divorce, sometimes including dipping into retirement savings. Such spending is generally a bad idea.
Those who withdraw funds early from IRA or 401(k) accounts are required to pay taxes on money that may otherwise go untaxed, and there might also be a penalty of 10 percent if the court hasn’t yet issued a property division order by the time funds are withdrawn. Retirement accounts can complicate the property division process, as the tax consequences of withdrawal must be weighed when the accounts are valued. Funds held in Roth IRAs, for example, are taxed on their way in, and so can be withdrawn tax-free in many cases. Traditional IRAs, though, and 401(k)s are not taxed on the front end, so taxes are generally taken on withdrawal.
The separation of assets should be clearly laid out in the decree of divorce and then accounts should be divided based on type. This is especially true in a high asset divorce. Individuals who are approaching or going through a divorce in may want to speak with an attorney. An attorney with experience in family law may be able to help by examining the unique facts of the situation and developing a negotiation strategy.