'Til Death Do Us Part
In the United States there are about 2.5 million weddings per year. When those happy couples each say “I do,” the last thing going through their minds is divorce. Realistically, however, there are 2.5 million divorces in the United States each year as well. Divorce isn’t something most people plan for and it can be a difficult and tumultuous time. Divorce settlements have long-lasting ramifications, and individuals are well-served to seek thoughtful professional counsel. Most people understand they need an attorney to seek advice on the legal aspects of divorce. Far fewer understand that certain financial professionals have acquired specific, detailed training to help clients better determine the short- and long- term value of divorce settlement options.
Do It Yourself? You Get What You Pay for.
A certified divorce financial analyst (CDFA) is expertly trained in analyzing a couple’s finances and identifying the ramifications of different settlement options. According to the Institute for Divorce Financial Analysts, over 50% of divorces are done “pro se,” without professional help. While individuals may be tempted to handle divorces themselves, money matters aren’t always as clear cut as they seem.
For example, a couple with $100,000 in IRA money and $100,000 in the bank might decide that one partner will take the IRA and one the bank account. This would seem to be equal, but it is not equitable. The IRA money will still be taxed upon withdrawal, and additional penalties can ensue if the money is accessed before a certain age. Those two $100,000 assets are not alike.
A CDFA is trained to analyze retirement assets like pensions, 401(k)s, real estate, and analyze the different aspects of a personal business. Qualified professional help, through a combination of legal counsel and financial advice, can make all the difference between getting your fair share, and leaving money on the table.
Why You Need a Certified Divorce Financial Analyst (CDFA)
There are many kinds of financial experts who can help you make the most of your money. Only one, however, is specifically trained to provide the financial support you and your lawyer need in analyzing all the financial issues of a divorce and presenting projections for any given divorce settlement.
A certified divorce financial analyst comes from a finance or legal background and undergoes intensive training that allows them to provide individuals with precise analysis. Key services include:
- Determining the outcome of selling or retaining the marital home — breaking down the costs and capital gains of selling, as well as the financial viability of retaining the marital home for either spouse
- Dividing up property (looking at the short and long term)
- Analyzing retirement plans, including pensions
- Assessing the insurance needs of the client, including qualification for COBRA health care
- Determining earnings capabilities
- Showing how inflation and rates of returns will affect investments.
A CPA is trained to identify an individual’s current finances for tax liability. In a divorce, they can help audit financials, provide forensic help to locate hidden assets, and project the tax liabilities of spousal support.
CFPs and ChFCs are trained to help clients achieve their individual goals whether they are happily married or going through a divorce. They look at current assets and liabilities and suggest a plan to achieve the client’s goals. They can adjust these tools during a divorce and help the client re-calibrate their plan.
A Certified Divorce Financial Analyst combines both of these functions to provide the fullest financial picture, projected forward in the future, to give clients and attorneys the full understanding they need of the implications of different financial settlements during a divorce.
Dividing Retirement Plans in a Divorce
Individuals want to make sure they get their fair share of marital assets during a divorce, but the value of retirement plans can be nuanced and difficult to estimate. A certified divorce financial planner (CDFA) has professional training to determine the future value of retirement plans; identify taxes and penalties that will apply if retirement monies are utilized before retirement age; and establish what types of distribution a retirement plan will allow. Individuals need to get sound advice for themselves and their attorneys on the value of different settlement options and retirement-plan divisions. Once a judge issues a divorce decree, it is final, and there is no chance to renegotiate.
Defined Contribution Plans
In a defined contribution plan, for example a 401(k) program, individuals can easily identify their balance. The subject becomes tricky, however, if an individual needs to use that money immediately. The IRS will allow individuals to take a one-time withdrawal of funds split by a judge in a divorce. After that, any funds withdrawn before age 59 incur a 10% penalty. It is important to note that if an individual takes that one-time withdrawal, the retirement plan administrator will withhold 20% of the amount for taxes. Additionally, penalties and taxes may be involved in rolling a 401(k) from one plan administrator to the next if not done correctly.
Defined Benefit Plans
In a defined benefit plan, such as a corporate pension, there is no current cash value to split. A defined-benefit plan promises to pay an employee a dollar amount, typically per month, at some time in the future. A certified divorce financial analyst can help calculate the value of future benefits so that an individual may claim their fair share. Additionally, a CDFA can help determine the best way to obtain the funds from the plan administrator. For example, a defined-benefit plan may allow only certain types of dispensation. If a judge puts forth an order that one spouse is entitled to a lump sum of half the future value of a pension, a plan administrator may respond that the plan is not allowed to disburse funds in that manner, and the individual will have little recourse in regaining those retirement funds.
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Divorce & Money
The divorce rate has doubled for Americans age 50+ since 1990.
While your retirement plans may shift due to divorce, it is possible to get through a divorce without having to start over. This guide will help you understand the following concerns you may have, among others:
- How to split assets and who to turn to for help
- What documents you’ll need for divorce proceedings
- Where you’ll need to consider updating beneficiaries
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