Divorce Finance Tips

Divorce Finance Tips

Divorcing Couples Can Avoid the 10% Penalty on Retirement Fund Early Withdrawal

When couples divorce, there is often a retirement fund that needs to be split. This can be anexcellent source for a down-payment on another house. Under normal circumstances, however, these funds are subject to a 10% penalty by the IRS for an unqualified “early distribution”, ifthe funds are disbursed before the participant is 59 1/2 years old.

In a divorce situation, there can be an opportunity to avoid the 10% penalty. Let’s say that Sarah and John are getting divorced, and Sarah is getting half of John’s 401k, worth $640,000. Sarah’s half is worth $320,000. If Sarah needs to take $100,000 in cash for a house down-payment, there is a special rule that enables her to take cash without having to pay the 10% penalty. In Sarah’s case, it saved her $10,000 in penalties A Certified Divorce Financial Analyst (CDFA™) can help your client take advantage ofthis opportunity. It is important to know that avoiding the 10% penalty is only available before the money is transferred to another account, so your divorcing client needs to be aware ofthe rules before a serious mistake is made. Remember though, that income taxes will still need to be paid on this distribution.

New Tax Law Concerning Turning Rentals into the Family Home

A new tax law regardingdivorce and rental property went into effectJanuary 1, 2009. Assume that Blondie and Dagwood were divorced in December 2008. Theyowned several rental properties. Blondie kept oneof them and she decides to move into the rental earlier this year. It used to be that if Blondie wanted to sell the house after 2 years, she could apply her full $250,000 exclusion against the gain. But now the IRS wants part of those capital gains taxes that were accrued during the time it was rental property, starting January 1, 2009.

Scenario #1: Blondie moved into the rental in December, 2008. She sells this property in March 2011. There is a $240,000 capital gain which she is able to wipe out with her $250,000 exclusion because the house was not a rental as of January 1, 2009.

Scenario #2: Blondie does not move into the rental, but continues to keep the property rented out as she wants the rental income. Four years later in 2013, she moves into the rental. Two years later in 2015, she sells this property. There is a $240,000 capital gain. She is only able to able to wipe out 2/6 ($80,000) of the capital gain with her exclusion. She will have to pay taxes on the remaining $160,000. She will also have to pay tax on depreciation recapture.

Kevin Worthley is an investment advisor representative of the Retirement Planning Company of NE, a Registered Investment Advisor, 1287 Post Road, Warwick, RI 02888. He is also a registered representative of, with securities offered thru, Cambridge Investment Research, Inc. Member NASD/SIPC. RPC and Cambridge are not affiliated. Kevin can be reached with questions or comments at (401) 453-5558.

Divorce is Major Factor in College Financing

Divorce is Major Factor in College Financing

By Kevin Worthley, CFP®, CDFA™
(Published in the Newport Daily News, June 20, 2009)

This past week I was speaking with divorce attorneys on the benefits of pre-divorce financial planning and how the financial consequences of a particular settlement could make a large difference to their clients after the divorce is finalized. Often overlooked are the ramifications on college planning for the children of a divorcing couple. Family cash flow during the college years, financial aid, and the ability (or not) to meet the Estimated Family Contribution (EFC) are all factors that are heavily influenced by divorce and how the divorce is structured. Given some cooperation and planning by the divorcing parents, they and their student(s) may avoid costly mistakes and actually benefit from a properly-structured divorce settlement.

For financial aid calculations, most colleges (especially the public schools) usually only consider the “custodial family” of the student. This means the “non-custodial” parent living elsewhere may not have his/her income or assets as part of the aid calculations. (Private schools requiring the CSS Profile financial aid application will ask for the non-custodial parent’s financials, however). There may be a significant difference in the financial resources between the two biological parents and ideally, the student could potentially benefit by being the custodial child of the parent with the lower income and assessable assets. Parents should be careful though, as a parent with higher income and assets may also have more obligations that may lower their net EFC below that of the other parent.

Although Rhode Island law does not require provisions for college payments by divorcing couples, many parents often negotiate such obligations into their agreement to make sure one or the other contributes toward college in the future. If their students apply to private schools, documenting such obligations may actually work against the family, since colleges often ask (on the Profile application) whether the parents are divorced and if there is such a provision in the divorce decree. If so, the college chosen will often ask for copies of the divorce decree and this could work against the student in qualifying for aid. Assuming both parents are truly earnest in meeting college costs for their children, it may be better to leave such obligations un-documented if financial aid could be realized in the future. (Of course, if there’s a possibility someone will welsh on their promise, that’s another consideration and one’s attorney should certainly be consulted).

Many times, a student’s chosen college(s) will request financial information on the non-custodial parent, who then balks and refuses to provide tax returns, asset and income information. This is due to fears the college may require contributions from that parent that were not part of the divorce agreement. What many parents fail to realize is that colleges only assess certain assets in the aid calculations and even then, the percentage of value actually assessed of those assets are very low; often only 3-4%. Home equity and retirement accounts are often not even a factor either.

If you are a divorced parent with college-bound children, it may be beneficial to put aside bitter memories and past conflicts and cooperate together to find the most efficient and cost-saving solutions to pay college costs. With open discussion and a little less ego-protection, divorcing parents might be able to give their children some financial benefits or even find some cost-savings for themselves in college financing. Such measures may go a long way in at least giving the children the best start possible in their own lives.

Kevin Worthley is an investment advisor representative of the Retirement Planning Company of NE, a Registered Investment Advisor, 1287 Post Road, Warwick, RI 02888. He is also a registered representative of, with securities offered thru, Cambridge Investment Research, Inc. Member NASD/SIPC. RPC and Cambridge are not affiliated. Kevin can be reached with questions or comments at (401) 453-5558.

Even Divorce Requires Planning

Even Divorce Requires Planning

by Kevin Worthley

One of the more traumatic events in life is when a couple chooses to end their marriage and begin the divorce process. Adding to the trauma are the financial issues of separating assets and agreeing upon various forms of support for the spouse and the children.

In most cases, today’s divorce proceedings are based upon “no-fault,” where the process focuses on dividing assets and not the marriage problems. In short, it’s about the money. Coupled with the raw emotion that often accompanies a divorce, financial questions potentially present a dilemma for both the divorcing client(s) and the attorney(s) handling the legal aspects – how to resolve the divorce in such a way that is not only amicable, but financially sensible for both parties.

Unfortunately, the client, attorney and Family Court judge may not be well trained in financial planning. Divorcing clients need to make important financial decisions and agreements that may have a lasting impact – positively or negatively – on the rest of their lives. With such implications, even cases involving modest assets and income may require divorce financial analysis and the services of a qualified financial professional.

Consider the following example: Sam and Diane decide to divorce after 17 years of marriage. Sam earns a good salary at Smothers Bros. & Co. and Diane earns a small salary at her bakery business. They have two children, Chip and Cookie, a home with a mortgage and some retirement assets, including Sam’s pension at Smothers, which he would like to keep.

Diane wants to stay in the home with her children. Sam agrees to provide $800 per month in spousal support and the state-mandated child support until the children are 18 years old. In addition, he agrees to pay for the children’s college expenses. Since their home has a fair amount of equity, Diane agrees to let Sam have half the savings and his full pension, so the asset split is about even. On the surface, this seems like a fair settlement.

Fast-forward a few years, however; and Diane is in trouble. Though Sam has fulfilled his obligations, Diane has no money in the bank, her retirement savings are gone and the mortgage payments are several months behind, to the point where she is in real danger of losing the house. Suddenly, the settlement that seemed so fair a few years ago doesn’t look so good from her point of view.

This outcome may have been avoided through the use of a full financial analysis that showed while Diane had an equitable share of the marital assets, her “working capital” over time (and with inflation) would deplete rapidly. Though she still has her home, she cannot “eat the equity,” so to speak. An analysis (including tax and other divorce-specific information) prior to the final divorce settlement may have demonstrated to both her and Sam (and their attorneys) that this division may not work for Diane.

The earlier the financial professional is brought into the matter, the more options there may be for the client(s). Divorce financial analysis works well either for one client or for a couple seeking to resolve their issues using mediation or collaborative methods. The divorce financial planner does not in any way supplant the attorney’s role, but works solely as a resource to the attorney and their client for the client’s benefit.

Kevin Worthley is an investment adviser representative of the Retirement Planning Company of New England, a registered investment advisory group in Warwick, and a registered representative of Cambridge Investment Research Inc. (member FINRA/ SIPC). He can be contacted with questions or comments at 401-453-5558.