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The wrong retirement decisions can be costly in divorce

Most people start learning about money early in life. Whether it’s earning an allowance or making change to buy gum from a vending machine, the idea is clear. You get money and then you save it or spend it. While that’s a valid foundation for later in life, money is rarely that simple.

There are two areas that highlight the complexity of money and property: retirement savings and divorce. Anyone going through a divorce learns about equitable distribution, the core idea behind division of property. Each partner gets a fair share, but it’s rarely a sum cut directly down the middle.

Retirement accounts have unique rules.

Retirement assets are especially complex property. Tax law regulates how deposits, withdrawals and taxes apply. The Roth IRA is one of the most popular retirement savings accounts, and a key component is that early withdrawals have hidden costs. The government watches these investments closely to limit abuse.

When a divorcing couple splits their assets, it’s essential to make sure any property changes hands through the correct legal measures. Otherwise, you may lose significant money – money you’d been counting on when you’re ready to settle down outside of the workforce.

The wrong type of account is taxable.

To legally transfer funds from an IRA, either the name on the account should change, or funds must transfer directly to another IRA. Even if the intent is to put that money back into an ex-spouse’s retirement savings, it should never be moved to a private account.

A case in Michigan highlights what can happen under those conditions. Namely, a divorcing man paid his ex-wife’s retirement allotment and legal fees by transferring $140,000 to a checking account. This changed the savings’ legal designation, making it taxable income and putting him on the hook for $140,000 of extra income. Even though the money was awarded to his ex-wife in the settlement, the law states that the IRA owner (the husband) is the one subject to a court order.

Get fair value in division of property.

Financial matters are rarely as simply as the numbers first appear. It’s common to put your focus on completing a divorce without thinking about long-term implications. However, every time money changes hands you need to slow down and review the transaction details. In the Michigan case, the husband wrote a check in effort to move on with his life. Instead, he’s still paying for that decision today.

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