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You are here: Home / Archives for Pension

How to Split an IRA or 401(k) in a Divorce

July 19, 2012 by The Other Guy 11 Comments

Divorce is ugly.  Except under the most limited circumstances, no one wins in the divorce game.  Then, you add the complexity of money into the equation and it gets downright hideous.  In that emotional time, it’s easy to understand why so many people divide IRAs, 401(k)s, and other retirement accounts sub-optimally.

You can’t just “take the money out and give it to my spouse”  That would be a big mistake.  Let me count the ways:

Let’s assume you own a $250,000 401(k) balance.  The judge rules that you’re required to split that 50/50 with your spouse, so you decide it would be easiest to make a phone call and take the money out.  Ouch.  If you do that, you’ll be hit with a 10 percent early withdrawal penalty (yes you, not your spouse, and only if you’re under 59 1/2) and then the amount you removed is added to your taxable income for the year.  Now, for many reading this blog, you’ve just lost 35-45%.

So how do you give $125,000 to someone?  Oh that’s easy – you gift that to them.  But in your haste, you didn’t do this correctly either. To gift it, you either need to reduce your lifetime exemption by filing a form 706 with your income taxes next April, or pay a gift tax of 50%.

Long story short: “taking it out” could be a massive financial mistake.

Instead, consider asking for a QDRO, or Qualified Domestic Relations Order (pronounced quad-row).  A QDRO put together by a competent attorney and signed off on by the judge makes this transfer a ton easier.

First, it directs your retirement plan company to establish another qualified plan in the name of your spouse.  Then, it directs a tax-free transfer to that newly established account.  No taxes, no penalties.  Easy as pie.

Once you’ve begun working on that, you’ll want to make sure the QDRO says that your soon-to-be ex-spouse can’t make any loans or transfers from the account until it’s been split; or you could just pick a date to make the transfer effective on (retroactive) and put a fixed dollar amount based on that date’s plan balance.  This would protect the new beneficiary from being bamboozled by his or her ex.

Finally, don’t forget about pension plans.  A lot of those can be “QDROed” too.  For example, let’s assume your spouse earned a pension at his job of $4,000 during the 30 years he worked.  He was married to you for 20 of those 30 years – making you the owner of 2/3 of his $4,000 per month.  By putting the QDRO in place before he retires, she can have her own pension plan – quite the deal!

At the end of the day, divorce planning with money is just as important as married couple planning.  If you don’t do it, you’ll regret it.  Take the time to review everything – hire a professional and don’t try to cut corners.  The costs are too severe.


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Filed Under: money management, Planning, Tax Planning Tagged With: 401(k), divorce, IRA, Marriage, Pension, QDRO, Qualified domestic relations order, Roth IRA, Tax

Are Senior Workers As Respected As They Should Be?–A Cuppa Joe Discussion

March 29, 2012 by Average Joe 21 Comments

My dad is a GM retiree.

Where do your thoughts jump when you read that statement?

I was in a coffee shop recently where two men were talking about legacy costs…paid out to people like my dad. These were both younger workers, and the opinion seemed to be that people like my dad are an unnecessary tax on the system.

One guy said, “Those people should have saved more money. If they’d saved, they wouldn’t need that pension.”

I know that immediately many people who read this will think my dad is part of the reason GM went bankrupt. He receives a generous pension, has health care coverage and lives comfortably. He’s relatively young still and I hope he lives for a long time. That means that his benefits will continue to weigh on the company.

 

No Savings? Why Not?

 

My uncle also is a GM retiree. Around the year 2001, as the stock market experienced day after day of unnerving free fall, I happened to be standing next to him at a funeral.

Uncle: The stock market sure is all over the place. Your job can’t be easy right now.

Me: No, it’s not. Lots of people with 401k plans out there taking a beating and looking for advice.

Uncle: 401k plans?

Me: Yeah, like the one you have at GM.

Uncle: You know, I’m glad I never bothered with that. Look at all the money those people lost. I’ll stick with the pension.

At first, I thought poorly of my uncle. But for him and many others working in industry, a 401k plan was always considered “icing on the cake.” He also receives a generous pension and has health care coverage. Why should he risk hard won dollars in investments that could tank?

Because he didn’t invest online, mainly to practice internet safety for seniors, he’ll now be a burden on the system for years to come. However, the course he chose was a viable option at the time.

 

Reworking the Implicit Deal

 

This article at Timeless Finance recommends (among other things) that older Canadians should be forced into retirement by age 60. According to the author, this will energize the workforce and help young people get jobs….all at the expense of older workers.

Would this really work as intended? Will it help?

Before we tackle that argument, let’s evaluate the historical situation: it was a different game for my dad than it is for many of you and I. He worked in an era of “work for a large company to care for your family for 30 years, and then the company will take care of you.”

It was an implicit deal.

Now the deal has changed, and there’s a push to change it further. I’m sure many older workers wish the deal had been explicit.

You have to be a moron to not understand the shaky economics of our world financial situation.

  • There’s more fallout to come from the housing crisis.
  • The student loan bubble is about to pop.
  • European states are ready to topple like dominos.

But do we have to immediately jump to changing the deal for people who played the game “correctly” only to find the rules changed later?

 

Will Eliminating Older Workers Help?

 

I only told you half of the story about my dad and uncle. The other half is that both my uncle and dad are gainfully employed at the moment. They both play by the rules (their income is low enough that it doesn’t affect their guaranteed income stream from Social Security or their pension plans).

It isn’t just good for my relatives; it seems it’s good for business. According to this Entrepreneur magazine article, companies that hire older workers reap benefits as wide-ranging as:

  • Higher quality work
  • Punctuality
  • Listening skills
  • Organizational skils
  • Honesty

According to the Timeless Finance author, both my dad’s and uncle’s part time jobs should be handed to younger workers.

But I’ve seen my uncle and dad work at their jobs. Young coworkers ask their opinion frequently. In fact, the owner of the golf course where my dad works often consults him about overall operations. Customers gravitate toward them, thinking these men know what they’re doing. Both of these men possess tons of insight and knowledge help their employers succeed.

My opinion: If I still had my boner of the week segments, this Timeless Finance article would have been on it. While some of the suggestions make sense to me, and we clearly need change, I believe that we should look elsewhere for money rather than eliminate experience for youth. I also think it’s a mistake to penalize people who played by the rules as they knew them until we’ve looked under other stones.

Okay, everyone….your thoughts? Do we treat seniors fairly? Should we have a mandatory retirement age?

(photo credit: Hubert Elliot in the Rowan County Maintenance Yard Office: NCDOT Communications, Flickr)

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Filed Under: Cuppa Joe, Feature, Meandering, smack down! Tagged With: 401(k), free advice, free financial advice, Individual Retirement Account, Mandatory retirement, Pension

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