Tax Implications – Property Settlements
“In this world nothing is certain but death and taxes” – Benjamin Franklin
These famous words were written in 1789, and still hold true today. In a divorce, many people look at $10,000 in a Roth IRA, $10,000 in a 401(k) and $10,000 in a mutual fund account as being worth the same amount of money – $10,000.
Reality is very different.
$10,000 in a 401(k) will be fully taxed when you take the money out in retirement. In addition, if you need the money today and are under 59 1/2, you may have to pay an additional 10% penalty. Compare this to a Roth IRA. There is no tax on the increase in value every year, no tax in retirement, and you may even be able to take the money out today without penalty.
Again, it is important to consider your unique situation and make sure you deal with after-tax numbers, not pre-tax.
If you are the higher earning spouse, the Roth IRA is more valuable than a 401(k). Depending on your state tax rates, the 401(k) may need to be 40% higher (or more) to net the same after-tax value as the Roth IRA.
If you are the lower earning spouse and are in a very low tax rate, there is not much of a difference for you between the three types of accounts. This gives you more flexibility in your negotiation.
*This is provided as information only. Consult with your financial professional to understand the impact of this issue on your personal financial situation.