The emotional and financial impact of a "gray divorce" can be overwhelming.
A 2022 study from the Journal of Gerontology found that 36% of divorces were among people 50 and older.
Beyond the emotional strain of a divorce, managing your finances is critical.
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An Allianz Life study found that 40% of married Americans who went through a divorce said it derailed their financial retirement strategy.
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Here are six important financial considerations if you're facing a gray divorce.
1. Dividing assets
In an ideal divorce property settlement, each spouse receives half of mutual assets, the most equitable division. In some cases, one spouse wishes to retain the couple's primary residence, which can create challenges regarding equitable division.
The most important consideration related to splitting assets is to remember that not everything is equal.
For example, if one spouse gets $750,000 of a taxable brokerage account and the other spouse gets a $750,000 traditional IRA, this might appear to be a fair division of assets.
However, this isn't equitable. The tax treatment of IRA distributions is more onerous than distributions from a taxable investment account.
Certain assets can be especially complex in a divorce settlement:
Annuities. If an annuity is owned by an IRA, the nonowner spouse must provide the insurer a copy of the court order or divorce decree and establish their own IRA for receiving their interest due to a "transfer incident to divorce."
Depending on state law, the insurer might be required to provide a new contract to this spouse with a new "free look period" that can help avoid expensive surrender charges.
Fixed index annuities can be hard to value in a divorce. The cash surrender value is not always the same as the account value, so be sure the property settlement agreement stipulates which value is being used for the division of assets.
Deferred compensation. Most deferred compensation plans are "non-qualified" plans and as such they don't fall under ERISA. The plan document usually stipulates how plan assets are treated subject to divorce.
Valuing deferred compensation assets can be challenging due to the distribution election, the tax treatment and any vesting schedule that might apply.
Equity compensation (restricted stock units or RSUs and incentive stock options). These assets are often the most complex, especially if equity compensation represents a significant portion of household net worth. Equity awards have fluctuating values, vesting schedules and complex tax considerations, all of which make equitable division challenging.
If you have any of these assets, seek professional guidance from an attorney, tax professional or financial adviser before finalizing any property settlement.
2. Spousal support
Besides splitting the assets, there's the issue of support. If one spouse has substantially more assets or earnings, the other spouse might be entitled to periodic support payments (alimony).
If equitable division of assets is difficult, or creates a significant tax liability, spousal support can be used as a technique to provide a fair resolution. Current tax law makes alimony nondeductible to the payer and nontaxable to the recipient.
3. Retirement accounts
Follow the prescribed rules regarding the division of retirement accounts to avoid unintended taxes.
For example, 401(k) accounts are divided by the execution of a qualified domestic relations order, or QDRO. This enables the nonparticipating spouse to receive a portion of the 401(k) assets. This can be done tax-free if rolled into an IRA or 401(k).
An IRA is not an employer-sponsored plan and is not subject to ERISA. Therefore, a QDRO is not required for dividing an IRA.
The division of an IRA is handled through a "transfer incident to divorce." This means the transfer of funds from one spouse's IRA to the other's is outlined in the divorce decree or a property settlement agreement.
A 10% federal penalty can apply to distributions from retirement accounts prior to age 59½ — so be sure to consider this when planning for future cash flow needs.
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There are some strategies that allow someone to access qualified plan assets prior to age 59½ penalty-free.
It's also important for both parties to update their beneficiary designation once the divorce process is finalized.
4. Selling a home
Divorcing couples often need to sell their homes. If you sell your primary residence while you're married, under current tax laws, you can exclude up to a $500,000 gain, provided it's been your primary residence at least two of the past five years.
The transfer of a home from joint ownership to one spouse doesn't create a new tax basis. If one spouse takes ownership of the home through the property settlement and decides to sell it later, the capital gain exclusion is only $250,000.
5. Tax-filing status
The IRS rewards married couples with more advantageous tax rates. When you're married, you likely filed as married, filing jointly.
When you're divorced, you'll pay tax at the single rate (or the better head-of-household rate if you have a qualifying dependent). It's also possible that a married couple qualified for itemized deductions, but as separate taxpayers, they're no longer able to do so.
As for timing, if you're married on December 31, you're treated as being married the entire year. If you are divorced on December 31, you're treated as being single for the entire year.
6. Social Security benefits
You're entitled to Social Security benefits from your spouse if you were married at least 10 years. You can claim your own Social Security benefit or half your ex-spouse's benefit, if greater.
You must be at least age 62 to claim the divorced spousal benefit. Unlike the spousal benefit for someone who's married, your ex-spouse need not be receiving their Social Security benefit for you to get yours.
Additionally, if you receive divorced spouse Social Security benefits and remarry, your spousal benefit will end.
Dealing with divorce is never easy, but with gray divorce, the financial stakes are usually higher since more assets have been accumulated, and there's less time to rebuild assets.
Hiring a team of experienced professionals — an experienced divorce attorney, a financial adviser experienced in divorce issues, and a tax professional can help guide relieve stress and protect you from making an expensive mistake.
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