The only constant in life seems to be change, and navigating the way forward can be confusing and complex. Divorce and splitting of financial assets can be one of the most challenging changes in life, however with a little planning, preparation, and a few financial tips you can avoid mistakes and gain some peace of mind.
Spitting Investment Assets
It might seem like your primary residence is the biggest asset in a divorce, but don’t overlook investment accounts like 401ks, Traditional and Roth IRAs, etc. These accounts can hold hundreds of thousands of dollars, and serious financial implications if divided incorrectly. First, 401ks and other tax-deferred accounts should be specified in a proper legal documentation prepared by your family law attorney. Second, IRAs can be transferred tax-free through IRA to IRA, without additional documentation, but as always, it can be specified in legal terms if you choose. Handling these matters with counsel can lead to huge tax burdens and federal penalties for early distributions, please consult a professional.
Insurance and Annuity Splits
Permanent Life Insurance and Annuities should also be considered when discussing your financial assets. If you do not need the money right way, you can avoid tax implications by performing tax-free exchanges instead of lump sum cash distributions. Both permanent life insurance, which does have cash value, and annuities can be transferred tax-free through a 1035 exchange to a policy in your name. This is just another cool IRS rule that allows you to defer the taxes on asset gains until distributions are made. This tax-free exchange can be a great way to protect and provide for your future, and address other changes such as beneficiary designations.
So right now you are probably picturing fields of corn and possible a plow, but tax-loss harvesting simply means offsetting any financial gains with financial losses. If your divorce settlement requires you to sell property, investments, or other financial assets that have gained in value, you could face capital gains taxes when April rolls around. A great way to offset those gains is by selling assets that have lost value. For instance, if you bought that great mutual fund earlier this year and it is down 10%, selling it before the end of the year can help offset the gains from other asset sales. Make sure to get a comprehensive review from a financial professional first to determine if this is the best overall strategy for your situation.
Securities offered through MWA Financial Services Inc., a wholly owned subsidiary of Modern Woodmen of America. Member: FINRA, SIPC
Chauncey D. Minnick
Modern Woodmen of America