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Divorce After 50: Common Mistakes That Can Ruin Your Retirement

Tonight's post about divorce mistakes made by people over 50 was written by our Estates Attorney Extraordinaire, Steve Worrall.

Divorce can have on an emotional impact on couples of any age, but it can have a potentially devastating financial effect on the retirement plans of those who divorce later in life. When people divorce after 50, they usually experience a loss of income for both parties, and that can mean working longer to fund each person's retirement.

There are severalcommon mistakes made by those over 50 who are divorcing that can ruin their retirement plans:

1. They choose the house over other assets. For many people, choosing the family home in a divorce is less a rational choice and more often an emotional one. If the housing recession of the last few years teaches us anything, it's that you cannot count on a house as your nest egg. Further, a house is probably going to cost you more in other expenses like property taxes, maintenance and unexpected expenses like a roof or furnace replacement. So don't automatically give up retirement assets for a house until you weigh the costs.

2. They forget to consider tax implications of retirement assets. If you make the choice to divide retirement savings by one spouse taking the 401(k) and the other taking the Roth IRA, you need to realize that these are not equal distributions. If you withdrawal money from a 401(k) or traditional IRA, you will will be taxed during retirement, but if you withdraw from a Roth IRA, you are not taxed during retirement (because the taxes have already been paid). Therefore, the payout from the Roth IRA will be larger over time.

3. They roll over a spouse's retirement account into an IRA after the divorce. If you are under the age of 59 1/2 at the time of your divorce, you have a one-time chance to withdraw money from your former ex-spouse's 401(k) or 403(b) without having to pay the 10 percent early withdrawal penalty as long as those funds have been transferred to you under a qualified domestic relations order (QDRO). If you do a rollover and need to dip into the account early, you will have to pay that penalty. While it may be tempting to dip into retirement savings now, remember that you are eating into your nest egg that needs to last you for 20-30 years in your retirement.

Don't rush headlong into settlement without considering all the different ways that assets can be divided and making sure you are choosing the one that is best for you.

Steve Worrall

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