A divorce can transform various parts of your life, including your family (especially true for divorcing parents), social contacts and finances. In fact, divorce can affect today’s financial well-being and tomorrow’s too by altering retirement security.
Unfortunately, many people in West Virginia dip into their retirement savings to pay for living expenses during the divorce process or afterward. In many cases, when someone reaches into an IRA or 401(k) to remove funds, they can be exposed to withdrawal taxes and penalties.
Diminishing the future
The retirement account withdrawals also impact the future by denying tax benefits and value that would have accrued had the funds remained in the nurturing protections of the retirement vehicles. When you spend the funds now, you get what’s known as “present value” but you lose “future value” (the value of a current asset in the future based on an assumed growth rate).
In some cases, people not only withdraw funds from a retirement account, but they also stop making deposits into the accounts, which means they miss investment opportunities. Over time, that has an enormous impact on a 401(k), Roth IRA, pension and other retirement accounts.
In a recent article about divorce and retirement, a family law attorney noted that when “a substantial portion of the retirement account” is split in divorce, it “might lead to financial hardship for both parties” because the cost of two people living separately is substantially higher than it would have been for the two had they stayed together and used the full retirement account together.
“The same amount of money that could be enough for two people living in retirement together might not be enough for two people living in retirement separately,” writes Sabrina Shaheen Cronin.
A ‘nice’ way to save
She points out a couple of steps you can take to protect retirement savings in divorce. Her first: be amicable and willing to compromise as you go through the legal process and negotiate resolutions of often difficult divorce disputes. This can be especially important for divorcing parents who want to minimize the impact of their split on their children.
Cronin also notes that if you’re cordial in divorce and in the division of retirement funds, “you may save yourself a lot of grief, and money” by avoiding acrimonious (and expensive) litigation.
Of course, in many divorces peaceful resolution of difficult disputes is simply not possible. Cronin recommends studying the rules regarding penalties, fees and taxation that apply to your retirement plan so that you better understand the true impact of funds withdrawal and can then make informed decisions.
She also states that it’s crucial to have on your side an experienced family law attorney to represent you in divorce matters. A knowledgeable lawyer will be able to analyze your unique situation and determine which of many legal strategies to protect retirement accounts will apply. It is also advised to seek the assistance of other professionals such as financial advisors when making important decisions such as the division of your marital retirement accounts during your divorce.