Going through divorce is almost never easy. Not only is it the dissolution of a potentially decades-long romantic relationship, but it’s also the undoing of a significant legal contract.
At any age, this is not fun. But it can have even greater ramifications when it happens later in life. At a time when you’re supposed to be getting your ducks in a row and thinking about retirement, a divorce at age 50 or beyond may require you to go through some extra steps and some additional planning.
4 Things to Consider When Dividing Assets
Divorce doesn’t just mean you’re splitting up with your partner. It also means you’re splitting up the assets you’ve accumulated over the years. Depending on how long you’ve been together, this could be significant. You probably already know about splitting the house and your bank accounts, but did you know that your retirement accounts also need to be divided?
If you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), any earnings or assets accumulated during the marriage are simply split right down the middle. But if you live in one of the other 41 common law states, those same earnings and assets get divided “equitably”–which is where things can get complicated and contentious.
Joint bank accounts are one thing, but what if you have assets in an individual account? These can get tricky, so here are three things to consider when dividing assets after a later-in-life divorce.
1. 401(k) and IRA Accounts
By law, 401(k)s and IRAs can have only a single account holder (the “I” in IRA does stand for “individual,” after all). However, money contributed to these accounts while you were married is considered to belong to both you and your ex-spouse, so it’s fair game when it comes time to divide assets. This means that if you have a higher balance in one (or more) of these accounts than your ex, you may need to transfer funds over to them as part of your divorce settlement.
When it comes to 401(k)s, both you and your ex will need to submit a qualified domestic relations order (QDRO) with a state-level domestic relations court. Filing this QDRO allows you to state your case for how each of you wants to see the funds divided, but it’s helpful to keep three things in mind:
- The easiest, most tax-efficient way to transfer funds is for the receiving spouse to just roll the money into their own 401(k) account.
- It’s possible for the receiving spouse to take a direct distribution from their 401(k) account to pay for immediate expenses (like legal fees) and not be subject to the 10% early withdrawal penalty for those younger than 59 ½. However, that spouse would still be subject to 20% withholding for federal taxes, plus any other applicable state taxes.
- Money transferred directly to one of the spouses cannot later be deposited into that spouse’s IRA, and any type of rollover to an IRA needs to be completed within 60 days of receiving the money or the IRS will view it as taxable income (minus the 20% withholding).
For IRAs, QDROs don’t apply. Although, if you are planning on transferring funds from your IRA directly into your ex’s IRA, that needs to be outlined within the divorce settlement and submitted to the IRA plan custodian.
However, you may decide that you don’t want to give up anything from your retirement accounts. While you would still be on the hook for those funds, it’s possible to instead give up a larger stake in something else to offset that liability. For example, if you’re forced to give up 30% of a $500,000 401(k) account, that $150,000 could come from somewhere else. If you also have some high-yield investments, you may decide to instead transfer over more shares of those stocks to your ex to help pay for that $150,000 liability.
2. Pensions
Like 401(k)s and IRAs, pensions are technically individual accounts, but the money earned in them during your marriage is eligible to be divvied up in the divorce. However, unlike 401(k)s and IRAs, pensions can be more complicated to divide because plan rules, state laws, and whether a spouse has already begun receiving payments can all come into play.
But when it comes to pensions, the most difficult part about dividing the funds can actually be the emotional component. While you may feel territorial about all your individual accounts, maybe there were unique circumstances that led to you earning your pension, such as a long military career. If that’s the case, you can still substitute any financial liability from your pension with its equal value in another asset, just like with your retirement accounts.
3. Social Security
Believe it or not, it is possible to claim up to 50% of your ex-spouse’s Social Security benefits off their record, but with two important caveats: You need to be at least 62 years old, and you and your ex had to have been married for at least 10 years. If you meet those two criteria, you’re eligible to receive benefits off your ex’s record, even if they haven’t yet started to receive Social Security benefits (though, to do this, you must be divorced for at least two years).
To claim the full 50%, there are two more rules to keep in mind: You need to be at least full retirement age (FRA), which is 66 or 67, and your ex must be at least 62. Failure to meet these criteria will result in you receiving permanently reduced benefits.
Additionally, if your ex remarries, you can still receive Social Security off their record, and it won’t affect your ex or their new spouse’s benefits at all. However, if you remarry, you are no longer eligible.
Claiming Social Security off your ex-spouse’s record is a rare no-lose scenario for both parties, but deciding whether or not you should is a different story. Consult with your financial advisor to determine if it’s a smart move.
4. Inheritance
Finally, when it comes to dividing an inheritance, things can get complicated. Once you turn 50, it’s likely that your parents and/or your spouse’s parents are in their 70s or 80s. Unfortunately, with this more advanced age comes increased mortality rates and the likelihood that some of their estate will be transferred to you, as their children.
Getting an inheritance from a parent doesn’t necessarily qualify as an asset that needs to be divided in a divorce. If something like jewelry or a piece of fine art was bequeathed to just one spouse and not both, courts will typically side with the beneficiary and leave that diamond or painting off the list of dividable assets.
However, when it comes to something like cash or property, that’s where it can get tricky. If you inherited money or investments, and they were bequeathed only to you, but you transferred those funds into a joint account with your ex-spouse, then your ex would be eligible to lay claim to those funds. Additionally, if you were left a house or a piece of property that you never lived in but you both participated in fixing up and renting/selling, then your ex would also be entitled to any funds earned from that property.
Other Considerations
Whether you’re married or divorced, estate planning should always be something to keep in mind as you get older. What happens to your assets when you’re gone? When you’re married, the answer to that question might be easy. But if you go through a later-in-life divorce, that answer might change.
That’s why it’s important for you to review all your estate planning documents and make any necessary revisions as a result of your divorce. Don’t just look at your will, but also make sure you’re reevaluating your beneficiaries, power of attorney designations, and spousal trusts you may have established.
Another thing to think about is parental custody. For those age 50 and beyond, this might not seem relevant, but people are having children later now than ever before, so it’s certainly not out of the realm of possibility that you and your ex-spouse have minor children to think about. If this is the case, make sure you and your ex make any custody decisions with the best interest of your child(ren) in mind. You’ll also need to make financial plans for potentially lengthy custody battles.
There can be a lot that goes into a divorce–more than you may think. While your emotional and mental wellbeing should be top of mind, it’s also important to understand how divorce can affect your financial plan. Take the time to speak with your advisor and discuss how they can get you back on your feet and back to saving up for retirement.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
