A costly ‘gray divorce’ can upend your retirement plans


A variety of studies have been done to explain this gray divorce trend. But the reality is that years spent raising kids often transforms parents into very different people from who they were when they first got married. Couples discover they have nothing in common, and their children were the glue holding them together. They can only relate to each other in their roles as Mom and Dad and not as romantic partners.

So now that the kids are gone, so apparently is the magic in the marriage. Therefore, it is not unusual for couples to leave the marriage after the children leave home.

With no one to take care of, not happy with the marriage and often without a plan, couples find they may have done right by their kids but have failed to do right by each other. With no projects to keep them together anymore, they turn to divorce as an answer, hoping they will be happier in the next phase of life.

So what happens when people divorce at an older age? Many of the same things that occur at younger ages: emotional upset, change of residence, loss of savings and property, etc. Although men may be responsible for making the phone call to the therapist or mediator, it is often the wife who is calling it quits. In an age where we no longer need to depend on our partner for money regarding our basic needs, we strike out on our own, choosing freedom rather than a life where our emotional needs aren’t met.

But what about our financial needs? When divorce becomes part of the financial equation, retirement can be more difficult than simply choosing what time to play golf.

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Gray divorce potentially endangers retirement for both parties, since they may be living on half the income they’d expected to have and may feel resentful about their change of plans. Fortunately, these divorces do not involve child custody fights, but they can still be emotionally and financially draining.

To that point, whatever money the couple has in 401(k) plans, individual retirement accounts, 457 or 403(b) accounts and pensions will usually need to be divided — often with that pricey legal tab, which may include a Qualified Domestic Relations Order, or QDRO.

Some points to remember that apply to all divorces:

  • IRA transfers need to be done trustee-to-trustee. In other words, you cannot just write a check to your ex-spouse — if you do, you will be subject to taxes and penalties.
  • The IRA division must be specified in the divorce decree and is considered a “transfer incident to divorce.”
  • A QDRO is not needed to transfer an IRA; be careful, however, not to transfer anything out of your IRA until your divorce is final, or it will be considered a taxable distribution by the IRS.
  • You will need a QDRO if you need to divide any non-IRA retirement plan. If you don’t, the amount you transfer to your ex-spouse will be considered taxable income to you if done improperly.
  • Be sure to hire an attorney who specializes in QDROs if you need one written; this is a specialty, and your divorce attorney is not necessarily an expert in this area.
  • Mistakes can be very expensive and time-consuming. An inexperienced QDRO writer’s work may need to be redone if found to be defective.
  • Your financial planner will need to analyze the after-tax effect of offsetting property divisions (half a 401[k] in exchange for half a house, for example).
  • After divorce and any distributions, make sure all of your beneficiary designations are updated.

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