Splitting Assets

IN A DIVORCE, you should be able to keep any assets you owned at the time of the marriage, plus any gifts and inheritances you received while married. What about other assets acquired during the marriage? How those are divided will depend on state law, especially whether you live in a community property or common law state. Even then, it’s important to pay close attention to the financial details:

Get all joint debts paid off. If you rely on your ex-spouse to continue making payments on loans that are in both your names, you’re putting your credit history and credit score at risk.

Decide which assets you want. Many folks want to keep the family home, so they have a sense of stability and continuity. But if you do that, are you locking up too much of your wealth in your home—and could you afford the property taxes, maintenance and homeowner’s insurance? If the property is worth more than you paid, you may want to sell it while still married. You can avoid taxes on $500,000 of home price appreciation if you’re married, but that drops to $250,000 once you are single.

Consider embedded tax bills. Suppose you have two individual stocks held in a regular taxable account and both are valued at $20,000. One is worth less than the price paid and the other is worth more. The latter may seem desirable because it’s been a winning investment, but you’ll owe taxes when you sell, while the stock with a capital loss will give you a tax break.

Similarly, a traditional IRA or 401(k), with its big embedded income tax bill, is worth less than a comparable sum in a Roth account. Need to move retirement account money from one spouse to the other, so you equalize your assets? If done properly, you can avoid triggering an immediate income tax bill or tax penalty.

Think about the transition. If a divorce will compel you to return to work, you may want to seek taxable account money in the divorce, rather than retirement account money. This will give you savings you can easily draw on, should it take you longer than expected to find a job.

What if you’re receiving money from your spouse’s 401(k) or similar plan under a QDRO (qualified domestic relations order) and you think you’ll need to spend it? You can take the money as a lump sum and avoid the usual 10% tax penalty on withdrawals before age 59½, though you will owe income taxes. Be warned: If, instead of taking the lump sum, you transfer the 401(k) assets to an IRA and then try to spend the money, you will likely get hit with tax penalties.

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