Divorce is an emotionally charged and complex time. Often one area that gets overlooked is its impact on your retirement savings. From splitting assets to reassessing financial goals, divorce can affect your financial future. High-profile divorces, such as those of Tom Brady and Gisele Bündchen, Jeff Bezos and MacKenzie Scott, and others, have brought attention to the complications of dividing assets. While the sums involved may differ from the average person’s, the lessons learned from these cases can be extremely valuable.
Here are essential tips for protecting your retirement savings during divorce through the lens of high-profile cases.
Understand What’s on the Table
Individual retirement accounts (IRAs), 401(k) plan accounts, and pensions are owned individually, not jointly. However, during a divorce, these accounts, along with other individual holdings and any jointly held assets like a home or bank account, may be divided as part of the financial settlement. The first step in protecting your retirement savings is to ensure an accurate evaluation of all your retirement accounts. With so much money at stake, understanding the full picture of your finances is crucial a fair asset division.
Remember, the rules for dividing assets can vary depending on the state where you live. Understanding legal regulations applicable to retirement accounts in divorce can help retain as much money in your account as possible.
The divorce of Paul McCartney and Heather Mills is a notable example. McCartney’s wealth included cash, real estate, intellectual property rights from his music career, investments, and retirement funds. The court required a detailed inventory of all assets to make an informed decision on the settlement. By taking stock of all retirement accounts, McCartney could ensure that the division of assets was equitable. This was particularly important given the high stakes and public scrutiny of their divorce. While their wealth was enormous, the principle remains the same for everyone. Getting an accurate assessment of all assets is key to a fair settlement.
Use a QDRO to Avoid Penalties
Dividing retirement savings can be intricate, and if not handled correctly, it could result in hefty taxes and penalties. During a divorce, you could lose all or part of your 401(k) account—or gain a part of your ex-spouse’s. The terms of this arrangement are typically outlined in a Qualified Domestic Relations Order (QDRO). A QDRO allows retirement accounts to be split without triggering early withdrawal penalties, protecting both parties in the process.
Gisele Bündchen reportedly used a QDRO to divide retirement assets with Tom Brady. Even though they both have significant wealth, using a QDRO prevented unnecessary penalties. This legal tool helped them navigate the complexities of asset division without incurring additional financial burdens. For the average person, the stakes may be lower, but it’s equally essential to use a QDRO to preserve retirement savings during divorce. Consulting with a financial advisor or attorney who specializes in QDROs can help you understand the process.
Tax Considerations in Divorce Settlements
When dividing retirement savings during divorce, it’s important to consider the tax implications to avoid unnecessary penalties and taxes. Here are some key points to keep in mind:
- Rolling Over Funds: The most tax-efficient way for the receiving spouse to handle retirement funds is to roll them directly into their own retirement account. This avoids immediate taxes and penalties.
- IRA Rollovers: If funds are transferred directly to the receiving spouse, they cannot later be deposited into an IRA. Any rollover to an IRA must happen within 60 days of receiving the money. If not, the IRS will treat the funds as taxable income, minus the 20% withholding.
- Alternative Asset Division: To protect retirement savings, account holders might choose to give up other assets. This may include a larger share of home equity or investment accounts to meet financial obligations to the other spouse.
When Amazon founder Jeff Bezos and MacKenzie Scott divorced, their settlement included a massive division of assets, including real estate, investments, and retirement funds. In fact, this divorce was one of the most expensive in the world, with Scott receiving $38.3 billion when it was finalized in 2019. Despite their immense wealth, careful planning of their asset division allowed them to minimize tax liabilities, especially on stock transfers. By transferring Amazon shares directly to Scott, they avoided immediate capital gains taxes. However, Scott would be responsible for any future taxes on gains when she sells the shares.
Reassess Retirement Expectations
Divorce often leads to increased living expenses, as shared costs are no longer split between two people. You may need to rework your budget to reflect your new circumstances and ensure that your retirement savings goals remain on track. After dividing assets consider whether adjustments are necessary, such as delaying retirement or increasing your savings rate. Also, don’t forget to update your named beneficiaries on your retirement accounts, life insurance policies, annuities, trusts and bank accounts.
When Madonna divorced director Guy Ritchie, they had to divide their assets, including income streams from her music career and his film work. While they both continued working after the split, Madonna reportedly adjusted her financial strategies to accommodate the division of assets. This shows that even if you’re a high earner, revisiting your retirement strategy after divorce is key. For the average person, this means reassessing your retirement plan to ensure your goals remain achievable despite the financial impact of divorce.
Don’t Wait to Seek Out Guidance
At the end of the day divorce can be hard to navigate on your own, especially when it comes to retirement savings. At minimum, be sure to seek out help from financial advisors, tax professionals, and divorce attorneys who specialize in asset division. Even if funds are limited, resources are available. Many communities offer free or low-cost legal aid services, and organizations like the American Bar Association and National Association of Personal Financial Advisors can connect you with professionals who offer pro bono or sliding scale services.
Recent celebrity divorces, such as those of Ariana Grande and Dalton Gomez, Sophie Turner and Joe Jonas, and Britney Spears and Sam Asghari, highlight the importance of professional guidance. Despite their high-profile statuses, these celebrities had to navigate the division of assets, including retirement accounts and future earnings from royalties and other sources. With the help of a team of pros, they were able to reach an optimal conclusion to their divorce.
Final Thoughts
Divorce is a major life transition that can have long-term impacts on your financial future. While the money in high-profile divorces may be eye-popping, the financial principles at play are relevant to anyone going through a divorce. Just like Tom Brady and Gisele Bündchen, it’s essential to approach divorce with a focus on long-term financial health, even when emotions are running high.
The bottom line: divorce can be expensive and numerous assets are on the line. Regardless of the complexity of your divorce, it’s essential to take proactive steps to ensure a fair division of assets and secure your savings amidst these significant life changes.
