Not every asset is equal in divorce

Although the dissolution of a marriage often causes two spouses to be at odds with each other, there is one thing they can often agree on: the process is a hassle. Not only can divorce reek emotional havoc on both spouses but also it can be financially damaging. Unfortunately, making major financial mistakes during this type of family law proceeding in Massachusetts can have negative long-term consequences.

A big mistake often made during divorce is not taking into consideration its tax implications. Not every financial account is vulnerable to taxation in the same way. For example, a 401(k) account with $100,000 in it is not equal to $100,000 in a checking account, as withdrawing money from a checking account does not incur any tax, whereas any money withdrawn from a 401(k) is taxed as income.

Another common tax-related mistake during divorce is failing to get a qualified domestic relations order (QDRO), a court order, to get some of a future ex-spouse’s 401(k). With this order, money can be withdrawn from a 401(k) without incurring a 10 percent penalty for early withdrawal. However, there is a tax penalty for not rolling this 401(k) money into an IRA within 60 days. No QDRO is necessary for splitting an individual retirement account during divorce.

The process of splitting assets during divorce can be overwhelming and confusing no matter how much or little money or other assets one has. However, an attorney can explain the process and help with making informed decisions at the negotiation table. It is within one’s rights to pursue a personally beneficial and fair divorce settlement in Massachusetts.

Source: cnbc.com, “When it comes to divorce, not all assets are equal“, Sarah O’Brien, Sept. 22, 2017