Divorce and My IRA

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CaliGirl
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Divorce and My IRA

Postby CaliGirl » Sun Jun 18, 2017 12:18 am

Hi.

My husband and I are planning for a divorce. We are 51. I started an IRA back in January. It has $10,000 in it. We live in WA, a community property state. Would it be better for me to give him half, or just empty it and pay the taxes given it's such a small amount?

Thanks!

Goal33
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Re: Divorce and My IRA

Postby Goal33 » Sun Jun 18, 2017 12:31 am

Divorce is expensive enough, give him half but don't pay extra taxes by withdrawing money. Plus, there may be a penalty for withdrawal.
A man with one watch always knows what time it is; a man with two watches is never sure.

Sweep2nd
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Re: Divorce and My IRA

Postby Sweep2nd » Sun Jun 18, 2017 12:37 am

This info below is copied from: http://finance.zacks.com/split-ira-divo ... -4195.html

The answer to your question depends on whether you need to spend the assets or can leave them invested; always better to leave the assets in the IRA if you are able. Also, keep in mind that your spouse's IRAs and other pension investments are also half yours. The following seems to say that in a divorce the half the IRA can be rolled over to another account for your spouse without making it a taxable event.

Also you didn't mention what type of IRA; for instance, withdrawing from a Roth before 59 1/2 would cost you 10%; a thousand here, a thousand there and soon we're talking about real money.
Best of luck.

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CaliGirl
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Re: Divorce and My IRA

Postby CaliGirl » Sun Jun 18, 2017 7:54 pm

Thanks you for the replies.

My husband has no investments. He had $4k in a 401K a few years ago, but withdrew it. Since then he got a new job. He has a 401K with the new job but has not contributed anything to it.

Since I only have 10K in my roth ira, I think it would cost less to withdraw the money and pay the penalties and taxes than to split the account. The other options I'm aware of is a buy out, where he gets something of equal value. I'm leaving him almost everything in the house. We don't own the house. If I were to add up the value of everything i'm leaving him - furniture, computers, tv, kitchen appliances/accesories/dishes.....I'm sure it would come to far more than the $5,000 he would get from that account.

Alan S.
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Re: Divorce and My IRA

Postby Alan S. » Mon Jun 19, 2017 12:10 pm

CaliGirl wrote:Thanks you for the replies.

My husband has no investments. He had $4k in a 401K a few years ago, but withdrew it. Since then he got a new job. He has a 401K with the new job but has not contributed anything to it.

Since I only have 10K in my roth ira, I think it would cost less to withdraw the money and pay the penalties and taxes than to split the account. The other options I'm aware of is a buy out, where he gets something of equal value. I'm leaving him almost everything in the house. We don't own the house. If I were to add up the value of everything i'm leaving him - furniture, computers, tv, kitchen appliances/accesories/dishes.....I'm sure it would come to far more than the $5,000 he would get from that account.


If all the property is community property, you should each be left with equal value and which assets are split is negotiable. So if you leave him enough personal property your Roth could be left in place.

If you are thinking of a distribution, the taxes on the distribution should be fairly low. You need to know how much you contributed to the Roth to report a distribution. For example, if your contributions were 8k and the Roth is worth 10k now, any distribution up to 8k would be tax and penalty free. If you distributed half and paid him 5k, then your remaining 5k would be 3k of contributions and 2k of earnings. If you later needed to withdraw the rest of the account to cover future expenses, you would owe tax and penalty on the 2k of earnings unless the distribution was not done until your were 59.5, when it would all be tax free.

However, if you distribute the 50% per above, his share is not reduced by taxes and if you need to withdraw the rest of the account you will pay tax and penalty on 2k which is not to your benefit. So unless you are sure that you will not need a distribution for yourself until 59.5, he should get only get 5k less half the tax and penalty you will be paying on the 2k. That might be around 4600 distribution for him leaving 5400 in the your Roth. If you later needed to take out the 5400, your tax and penalty would bring your net amount received down to around the same 4600 you provided him.

In summary, the settlement should keep in mind the tax bills that will be due now or later. Either way, you need to check your records to determine how much you contributed to your Roth.

Afull
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Re: Divorce and My IRA

Postby Afull » Mon Jun 19, 2017 1:59 pm

I believe in a divorce a judge can issue a ruling that allows the custodian to split the two accts, one for each of you. Your divorce attorney should know this as this should be a common occurance.

I would not try and trade the Roth vs. house hold property as I suspect people tend to over value this property. Often the real value of selling is a pitance compared to cost of replacing.

Good Listener
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Re: Divorce and My IRA

Postby Good Listener » Mon Jun 19, 2017 2:50 pm

Stop. Stop. Do not do anything. If it is decided that the account will be split, the divorce document signed by the judge will indicate so. Then it will simply be split into 2 by the custodian. But community property does not mean everything is split exactly. That is, you don't each get half the folks and half of the car and half of your towels. So just wait. The ROTH is the best asset a person can have.

sharpjm
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Re: Divorce and My IRA

Postby sharpjm » Mon Jun 19, 2017 3:00 pm

Sweep2nd wrote:Also you didn't mention what type of IRA; for instance, withdrawing from a Roth before 59 1/2 would cost you 10%

Contributions to a roth IRA may be withdrawn tax and penalty free at any time. Only earnings are subject to tax and penalty when withdrawn early. Given that the Roth was opened in January, the earnings are probably quite small relative to the total balance.

Either way, Roth withdrawal is definitely not the best choice here.

MutualEdge
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Re: Divorce and My IRA

Postby MutualEdge » Mon Jun 19, 2017 3:13 pm

Good Listener wrote:Stop. Stop. Do not do anything. If it is decided that the account will be split, the divorce document signed by the judge will indicate so. Then it will simply be split into 2 by the custodian. But community property does not mean everything is split exactly. That is, you don't each get half the folks and half of the car and half of your towels. So just wait. The ROTH is the best asset a person can have.


+1

gotlucky
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Re: Divorce and My IRA

Postby gotlucky » Mon Jun 19, 2017 6:23 pm

Good Listener wrote:The ROTH is the best asset a person can have.


Absolutely! At age 51, I would rather have a $10k Roth IRA than $11k after-tax. The benefits of tax-free compounding and stretch IRA make it worth more than 110% it's face value.

Assuming 7% IRR, 3.5% inflation and 25% LTCG, the Roth has a NPV of $1450 more an than equivalent taxable account if you wait until age 59.5yo (the $1950 in tax savings discounted by 3.5%/yr). If you withdraw at 95yo, the Roth is worth twice as much today than a similar after-tax account.

If you plan on leaving this account to your heirs, they'd have the option of stretching the tax-free compounding over their expected lifetime. This can be a huge windfall if left to a young & disciplined grandchild.

Bottom line: Roth funds are, in general, much more valuable than an equivalent amount of cash. However, once you factor in penalties and taxes on non-qualified distributions, its value decreases.

CaliGirl
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Re: Divorce and My IRA

Postby CaliGirl » Tue Jun 20, 2017 1:58 am

Hi everyone and thank you again for your replies.

Right now I wish I had not opened my Roth IRA, but had waited until after the divorce.

So far, I have contributed $9,500. The account as of today is worth $10,202.71 - a difference of $702.71 in gains on the account.

As I understand it, since I have had the account for less than five years, I cannot withdraw anything - not even my own contributions - without a 10% penalty. I don't think i have to worry about taxes as this is after tax money.

It just seems like a 10% penalty of $1,000 would be better to pay than to have to pay $5,000 to my husband.

One thing is for certain - I'm not going to put any more money in the account until after the divorce. I'll save it up on the side and put it in later. If I did withdraw the funds, I would put them back in after the divorce. I wouldn't close the account.

Also, I don't plan to use a lawyer for the divorce. There's no house. We rent. He keeps his two trucks, I keep my van which is in my name only and I paid for. We have 3 kids, but two are grown and the other is 14. I have no problems with him seeing our 14 year old as much as he and she wish to. He keeps nearly all the household goods. I don't want them.

We've been divorced before - many years ago before we had children. I got the paperwork, filled it out myself. Had him sign it. I got it notarized. I paid the fees. All he had to do was sign and show up at the court house. It took about 5 minutes. I'm planning to do it this way again. I'm pretty sure he will agree.

Sandi_k
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Re: Divorce and My IRA

Postby Sandi_k » Tue Jun 20, 2017 2:33 am

You don't need to withdraw any funds. The judge will issue a QDRO as part of the divorce (assuming other items aren't valued as equivalent to him). That order goes to your account holder, who will legally SPLIT the existing account into two.

Since it's done at a judge's direction, there is no withdrawal or distribution, and thus no penalty or taxes are due.

IANAL - this is my understanding of how it works.

gotlucky
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Re: Divorce and My IRA

Postby gotlucky » Tue Jun 20, 2017 11:26 am

CaliGirl wrote:So far, I have contributed $9,500. The account as of today is worth $10,202.71 - a difference of $702.71 in gains on the account.


If this was a contributory Roth IRA, you can ALWAYS withdraw your original contribution penalty and tax free. So you can pull out $9,500 today tax and penalty free. The earnings will be subject to penalty and tax if withdrawn before age 59.5.

If you and your husband are reasonable, I'm sure you can work out a solution. Hopefully one where you don't have to liquidate your contributions to pay him his share. There will be penalties and tax on the earnings, so maybe you can do an after-tax & penalty liquidation value and offer him half of that, say, payable over 5 years if you don't have the cash ready now. Then you can liquidate the contributions (penalty and tax free) if you can't come up with the funds. PM me and I can help you with this.

As I previously posted, Roth funds are more valuable than the face value and there are only limited opportunities to contribute to a Roth, so try to keep as much of it as possible and build on it.

Don't beat yourself up. You had very good intentions opening a Roth and most BHers would do the same if they had been in your situation. I commend you for handling the divorce without a lawyer. That really is the best way to do most things. Just try to get agreements in writing, document everything and keep good records.

Afull
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Re: Divorce and My IRA

Postby Afull » Tue Jun 20, 2017 1:44 pm

CaliGirl wrote:So far, I have contributed $9,500. The account as of today is worth $10,202.71 - a difference of $702.71 in gains on the account.

As I understand it, since I have had the account for less than five years, I cannot withdraw anything - not even my own contributions - without a 10% penalty. I don't think i have to worry about taxes as this is after tax money.



Actually you would only pay tax and penalty on the 702.71 in gains. Roths allow you to remove the contributions any time. Your Roth custodian can verify the rules for you.

Having said that, if you need to split it allow the judge to order that rather than withdraw.

GoodLuck.

Alan S.
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Re: Divorce and My IRA

Postby Alan S. » Tue Jun 20, 2017 2:06 pm

A QDRO does not apply to IRA accounts, the much simpler "transfer incident to divorce" does. But there is no early distribution penalty waiver for the receiving spouse with the latter.

If 50% of this Roth was transferred accordingly, each spouse would hold a pro rated or 4,750 of regular contributions and 351.35 of earnings. The holding period for both would be the year of the first Roth contribution made to the transferred Roth account.

Before this is done, the transferor spouse should be totally sure that there are no excess contributions involved or no intended recharacterizations of recent contributions. Remember that both parties will be single at year end and that will lower the MAGI amount to qualify for a Roth contribution for that year and that could create an excess contribution and eliminate any spousal contributions.

CaliGirl
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Re: Divorce and My IRA

Postby CaliGirl » Tue Jun 20, 2017 10:08 pm

Thank you again, everyone, for your replies.

Ok. According to Vanguard, on this page: https://investor.vanguard.com/ira/roth- ... tional-ira I can withdraw my $9,500 at any time without having to worry about taxes or penalties. The little bit that's left - my capital gains - at roughly $700 (it changes daily, you know), isn't a big deal. If a judge orders me to split it, then so be it.

So, I'm thinking about taking out my contributions, and putting them back in later, when the divorce is final.

I realize the account won't be earning much with my contributions taken out, but I would hopefully be able to put them back in within 3 - 4 months.

After the divorce, my husband's expenses will go down and then, if he wants to, he can start contributing to his 401K at work.

Oh, and being single won't cause any problems with the Roth because together we don't even make the amount of money that is the cut-off for a single person being able to contribute.

After the divorce I plan to raise my income, and if it gets to the point where I'm ineligible to contribute to the Roth IRA, then I'll be looking at opening a Roth 401K which, as I understand it, has no ceiling on earnings for contributing. But right now, this isn't an issue. My husband and I both earn about $48,000 a year.

Does this sound like a good plan - withdrawing my contributions and putting them back in a few months later? I don't think I'd be missing out on much in capital gains over that short of a time span. When I buy back the shares, it might be at a higher price, or it might be at a lower price, but again I doubt it's going to be an earth shaking difference.

So, what do you think? Would this be a huge mistake, or not that big a deal?

gotlucky
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Re: Divorce and My IRA

Postby gotlucky » Tue Jun 20, 2017 10:24 pm

CaliGirl wrote:Thank you again, everyone, for your replies.

Ok. According to Vanguard, on this page: https://investor.vanguard.com/ira/roth- ... tional-ira I can withdraw my $9,500 at any time without having to worry about taxes or penalties. The little bit that's left - my capital gains - at roughly $700 (it changes daily, you know), isn't a big deal. If a judge orders me to split it, then so be it.

.
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Does this sound like a good plan - withdrawing my contributions and putting them back in a few months later? I don't think I'd be missing out on much in capital gains over that short of a time span. When I buy back the shares, it might be at a higher price, or it might be at a lower price, but again I doubt it's going to be an earth shaking difference.

So, what do you think? Would this be a huge mistake, or not that big a deal?


You can't "replace" what you pull out now at a later date (well, maybe you can undo within a 60-day time frame or something, but you'll have to research that). Going forward, you can only make a new contribution for 2017 (if you haven't already) or for 2018 but once you pull you your previous year's contribution out, you've lost that amount for in your Roth forever.

ClaycordJCA
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Re: Divorce and My IRA

Postby ClaycordJCA » Tue Jun 20, 2017 10:29 pm

Why would you withdraw all of the contributions if your husband is only entitled to half?

Personally, I wouldn't withdraw anything right now. Instead, I'd try to offset his interest in the Roth IRA against your interest in some of the other property. For example, even assuming one of the trucks balances out the van, there is still another truck in play and the household goods.

CaliGirl
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Re: Divorce and My IRA

Postby CaliGirl » Wed Jun 21, 2017 2:03 am

Thanks, you guys!

Actually, I don't think my husband even realizes that he would be entitled to half that money. He doesn't research things that way I do. Even if he knew, I don't know whether or not he would take it.

My concern is that a judge would give it to him, even if the divorce papers stipulate that the account will remain mine and won't be divided. I've read this can happen.

I had completely forgotten about pulling out last year's contributions to the Roth. Darn! You're right. I can't make that up. I can't put that money back in. So, I guess I'll leave the Roth as is for now, continue to build up money on the side to contribute but not put it in yet, and try to get the divorce as quick as I can.

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TNL
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Re: Divorce and My IRA

Postby TNL » Wed Jun 21, 2017 11:34 am

I am sorry. I don’t mean to be rude, but some of the “advice” that I have read on this thread is some of the worst advice I have ever seen.

I practiced family law for 10 years in both a community property and non community property state. I made oodles of money fixing divorces that well-meaning people trying to save $2,500 had done themselves. When minor children or any real property at all or any investments of any kind are involved, even if the parties can agree on a custody plan or asset division – do NOT try to complete the paperwork yourself without at least having an attorney review the settlement agreement and proposed decree for compliance with the applicable codes and statutes, as well as for unintended consequences down the road if either party doesn’t comply with the terms. It’s truly a recipe for disaster. The worst case I had in this regard is a case where the husband and wife divorced and owned a house and a rental property. They agreed that he would keep the main house and she would get the rental property. However, there was no requirement in the decree that either refinance the property into their own name, or provide a recourse if either party stopped making payments on the mortgage. To make a long story very short, she stopped making payments on the rental house and his credit was ruined. There was easy no way for the court to award him fees or require her to sell the house. Eventually we got this done but it took a very long time and about $20,000 more than it would have cost to do it right had he come to me in the first place. Bad, bad, bad.

Now, for the OPs situation:

First, if the IRA was opened during the marriage, it is community property. Like it or not, the husband is entitled to half of the account value.

Because the account value is fairly low, it would be best if you have other assets (household goods, the vehicles you mentioned, etc.) and can “horse-trade” him some personal property and get him to walk from the IRA. Tell him he’s getting to keep both vehicles, give him extra furniture, whatever. See if you can get him to walk from the money, just for no other reason than to save yourself the administrative hassle of rolling out money to him.

If the agreement involves him getting a chunk out of the IRA, then contact the plan administrator and see what they require. Judges don’t “issue” QDROs. They have to be prepared by an attorney or a party and then signed by the court, just like a proposed order. Some plans require them; some don’t. In my experience, most defined benefit plans (pensions) require them (because a division of a pension requires more sophisticated calculations involving years worked in the job, years in the marriage, etc.). In my experience, most defined contribution plans (401Ks, TSPs, etc.) do not require a QDRO but could require some other type of order. Check with the plan administrator BEFORE you finalize your decree and if possible, send that down to court at the same time as the proposed decree.

Lastly, if your husband does end up with a portion of the IRA, make sure that the decree contains a provision that he is required to initiate the process of the transfer within 120 days of the decree being final. I had several cases where people sat around for a year or two waiting to transfer retirement funds out of a 401K and paperwork can get lost, people try to change jobs, whatever. It is not a guarantee that he actually will do, but you have some recourse if he doesn’t.

With regard to the custody issue, I highly recommend paying an attorney really for even one or two hours of time to find out what the state requires in terms of a parenting plan. If you have primary custody of the child, you are probably entitled to receive child support under the statute, as well as contribution from him for half of her medical expenses and health insurance and in some cases, reasonable extracurricular activities. (I see that your child is 14, so probably no daycare expenses).

Good luck –

TNL

Alan S.
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Re: Divorce and My IRA

Postby Alan S. » Wed Jun 21, 2017 1:29 pm

CaliGirl wrote:Thanks, you guys!

Actually, I don't think my husband even realizes that he would be entitled to half that money. He doesn't research things that way I do. Even if he knew, I don't know whether or not he would take it.

My concern is that a judge would give it to him, even if the divorce papers stipulate that the account will remain mine and won't be divided. I've read this can happen.

I had completely forgotten about pulling out last year's contributions to the Roth. Darn! You're right. I can't make that up. I can't put that money back in. So, I guess I'll leave the Roth as is for now, continue to build up money on the side to contribute but not put it in yet, and try to get the divorce as quick as I can.


You are correct that your 2016 contribution cannot be withdrawn and returned. However, you could request a return of your 2017 contribution with allocated earnings and you have until 4/15/2018 to replace that contribution with another 2017 contribution. That is 10 months. Conversely, if you just pulled out a non specific $5000, then you only have 60 days to roll it back to the Roth IRA, and you will have used up your one permitted rollover over a 12 month period.

Of course, in most cases a transfer incident to divorce is better than taking a distribution if it turns out you have to transfer a part of the IRA, but your balance is low enough and there are enough other assets that might be transferred to get the split to a mutually acceptable 50-50 end result without involving your Roth.

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SeeMoe
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Re: Divorce and My IRA

Postby SeeMoe » Fri Jun 23, 2017 7:43 pm

CaliGirl wrote:Thanks you for the replies.

My husband has no investments. He had $4k in a 401K a few years ago, but withdrew it. Since then he got a new job. He has a 401K with the new job but has not contributed anything to it.

Since I only have 10K in my roth ira, I think it would cost less to withdraw the money and pay the penalties and taxes than to split the account. The other options I'm aware of is a buy out, where he gets something of equal value. I'm leaving him almost everything in the house. We don't own the house. If I were to add up the value of everything i'm leaving him - furniture, computers, tv, kitchen appliances/accesories/dishes.....I'm sure it would come to far more than the $5,000 he would get from that account.

Since it's only $5k, why not let him have a taste of success? He may even see the light regards investing in his company pension plan , saving you trouble later should he come betting for crumbs due to zero retirement savings....

SeeMoe.. :idea:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}


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