Divorce can have unexpected financial consequences. Property and asset division may lead to higher costs that were not apparent before the issuance of the decree.
Taxes can change the value of apparently equal assets. $100.00 in cash, for example, has a different value than $100.00 stock because selling stock has a tax impact.
Profits on the sale of certain assets, the difference on the cost basis or the payment and sales price, are taxed as long-term or short-term capital gains depending on whether the asset was held for under or over one year. Cost basis and taxes may be different for assets that have equal value. Taxes should be subtracted from the asset’s value when dividing property. Withdrawals from a 401(k) account will be taxed at ordinary income tax rates. Discounts for taxes should be considered during property division.
A 401(k) or other workplace retirement accounts deserve attention. There will be 20 percent tax withholding if an account holder gives withdrawals to their spouse. There is an additional 10 percent penalty for early withdrawals if the account holder is under 59½.
A qualified domestic relations order may help prevent additional costs. The court and the 401(k) administrator must approve a QDRO. A separate QDRO is required for each workplace account. The QDRO must specify how a spouse can receive a share of their ex’s 401(k). The first method, a trustee-to-trustee transfer to a rollover, is not taxable. The second method allows a spouse to receive funds directly from the 401(k). The recipient must pay ordinary income taxes on any amount that is not contributed to a rollover IRA within 60 days. There is no 10 percent early-withdrawal penalty.
A QDRO is not required if the spouses divide an IRA. But there must be a trustee-to-trustee transfer and the funds should be placed in the recipient’s rollover account.
If each spouse intends to get a percentage of retirement assets, the decree should contain that percentage and not a dollar amount. Gains and losses on the account may change the percentage figure.
If one spouse keeps their home, their ex is no longer a joint owner or responsible for the mortgage. That spouse must refinance the mortgage and meet qualification requirements.
An appraisal for determining the home’s value and calculating its cost basis is important. If the spouse later sells their home, they are individually liable for capital gains taxes on any profit that is over the current $250,000 per person exclusion. This is $500,000 if the couple has joint ownership and sells it.
An attorney can provide options. They can help assure that property division is fair and reasonable.