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Rebuilding retirement savings after divorce

On Behalf of | Aug 13, 2018 | Divorce

Like real estate and bank accounts, retirement plans need to be split during a divorce in California. This news sometimes shocks people when they learn that half of their 401(k) savings will no longer be available for their retirement. Such a financial blow requires people to create an aggressive savings plan and prepare for taxes.
Divorcing late in life makes it harder for people to rebuild their savings in tax-deferred retirement accounts. Currently, only $18,500 can be set aside tax-free in a 401(k) every year for someone under the age of 50. At age 50, people can boost annual contributions to $24,500, but this amount still makes recovering from a six-figure loss in a divorce settlement difficult. One financial planner’s approach to this problem involved a client making maximum tax-deferred contributions and putting additional thousands of dollars into a taxable investment account. After five years, the person had built his 401(k) back up to $250,000 and had over $100,000 in the investment account.
In another situation, for a woman who was past retirement age, had a lower income and received a large retirement plan distribution, tax management was a priority. Since her retirement age prevented tax-free contributions, the rolling over of an IRA distribution into a Roth IRA allowed future earnings to grow tax-free and prevented forced distributions at age 70½. Although the woman needed to pay income tax on the distribution, her income remained under control and within a certain bracket going forward.
Legal advice could help a person navigate decisions during divorce negotiations and understand his or her rights to property or spousal support. If disputes erupt, an attorney might insulate an individual from hostile confrontations by managing discussions about property division. Once the parties come to terms, a lawyer could then draft the necessary documents for filing with the family court.