The end of a marriage for spouses over 50-years-old, known as gray divorce, can be financially costly although it does not usually involve child support disputes. These can upset financial planning for retirement by splitting the couple’s savings and other assets, accumulated over many years, in half.
The divorce rate for couples over 50 doubled since the 1990s. It has tripled for couples who are at least 65-years-old. These divorces are further complicated because spouses at this age may be taking care of their parents Also, research shows that 32 percent of adults from 18 to 34 now live with their parents. Dividing retirement assets makes these responsibilities even more daunting.
Any assets in 401(k) plans, IRAs, 457 or 403(b) accounts and pensions usually must be divided. Many financial precautions applicable to all divorces, are especially important for this property division in grey divorce.
IRA transfers should be made trustee-to-trustee after the divorce is final, instead of a direct transfer, to avoid taxes and penalties. IRA division should also be addressed in the decree and considered as a transfer incident to the divorce.
A qualified domestic relations order is not needed to transfer an IRA. However, a QDRO is needed for dividing other retirement plans. Otherwise, any transfer to the ex-wife is taxable income. The post-tax impact of offsetting property divisions, such as exchanging part of a 401(k) in return for half of the house, should be carefully reviewed.
If possible, financial planning for these couples can take contingencies into account such as divorce. Additional time may be needed to reposition their portfolios and change their financial plans.
Finally, it is important to update any beneficiary designations on insurance policies and pensions. Otherwise, these assets may be left to former spouses or in-laws instead of the intended beneficiaries after divorce.
A lawyer can assist spouses with planning for these contingencies and assuring that there is a fair and just divorce decree. An attorney can also assure that important legal documents, such as a QDRO, are properly drafted to avoid further expense and ambiguities after the divorce is final.
Source: CNBC, “A costly ‘gray divorce’ can upend your retirement plans,” Tim Sobolewski and Wendy B. Pegan, June 21, 2017