What Late-Life Divorce Means for Your Finances
More and more baby boomers are throwing in the towel and calling it quits. In 2010, one in four divorces involved couples over the age of 50, and people in this age group are now more likely to separate than they were just three decades ago. However, older couples have special needs that must be addressed when they choose to part ways with their significant others late in life. Here are some important things you need to know to help you make the best choices in your case.
The Tax Consequences Hit Harder
Dividing property and other assets may result in tax penalties that eat up some of your retirement savings. For instance, money placed into 401Ks and other plans are exempt from being taxed as long as it stays in the account until you hit retirement age. If you're required to withdraw money from your fund to give to your ex, the IRS will consider that money taxable income and you'll need to account for it on your returns. Additionally, if you withdraw the money before you turn 59.5, you'll have to pay a 10 percent penalty.
This isn't much of problem for younger people who typically have a few decades to make up the difference before they leave the workforce. When you're over 50, however, you don't have that luxury, and giving the IRS a chunk of your savings can mean the difference between living independently and having to move in with your adult children.
However, tax issues can come with any asset. For instance, you'll need to figure out how to pay for the property taxes on a single income if you happen to be awarded the home. It's important to take precautions—such as setting up a qualified domestic relations order or getting your ex take responsibility for some of the tax fall out—to minimize the tax consequences associated with your divorce.
You May Have to Share Your Retirement Fund
Speaking of retirement funds, there's a good possibility you may have to share yours with your ex. The risk is particularly high if you put comingled funds (i.e. money belonging to you and your ex) into the account or your ex didn't work for a good portion of your marriage to take care of the kids and household.
However, the amount you'll have to pay will vary and depends on a number of factors, one of which is whether you had money in the account before you got hitched and the amount of money added to the account during the marriage. Many states consider the funds that existed in the account prior to marriage to be personal property that stays with the owner of the fund. However, any money contributed to the account during the marriage may be considered marital property that's divided between both parties. Your ex's ability to provide for his or her own financial needs after the divorce will also be a factor as well as whether the person will be awarded other assets from the marriage.
It's critical that you handle the division of the retirement funds in a smart way to minimize any consequences that may result (e.g. tax obligations) and come up with a plan to replace the money as soon as possible.
Getting the House is Paramount
The family home becomes a much more important asset in your later years than it was when you were younger. By the time people have reached their senior years, the home is paid off (or close to it) and can be used in a variety of ways to protect their quality of life. For instance, you could earn income by renting the home out or take out a reverse mortgage to pay your late-life expenses.
Therefore, it's critical you do all you can to be awarded the home when you divorce from your spouse or at least get the equivalent value so you can invest in money in other property that may be of equal benefit to you.
For help with a late-life divorce, contact an attorney through firms like Bineham & Gillen, PLLC.