401k value for buy-out?

[justgetmeout]

I would like to keep my 401k and buy-out my spouse's portion using proceeds from sale of our house. If the account currently has $100K, do I pay half of this amount or half of the after-tax value or?

All contributions to the account were made during marriage.

Thanks much for any assistance!

What is the name of your state (only U.S. law)? KY

 

[LdiJ]

I would like to keep my 401k and buy-out my spouse's portion using proceeds from sale of our house. If the account currently has $100K, do I pay half of this amount or half of the after-tax value or?

All contributions to the account were made during marriage.

Thanks much for any assistance!

What is the name of your state (only U.S. law)? KY

Quite frankly, you will get two different and distinct answers on that subject here.

It is impossible to know what the "after tax" value of the 401k would be. You don't know what your marginal tax bracket will be at the time that you retire, unless perhaps you are very close to retiring.

Therefore, in my opinion its a dollar for dollar exchange.

However, another poster here feels very strongly that you should either not exchange retirement accounts for non retirement assets, or that the retirement assets should be adjusted for taxes (which again, you cannot know what your tax bracket will be at the time you retire, so you would be completely guessing).

 

[mistoffolees]

Quite frankly, you will get two different and distinct answers on that subject here.

It is impossible to know what the "after tax" value of the 401k would be. You don't know what your marginal tax bracket will be at the time that you retire, unless perhaps you are very close to retiring.

Therefore, in my opinion its a dollar for dollar exchange.

However, another poster here feels very strongly that you should either not exchange retirement accounts for non retirement assets, or that the retirement assets should be adjusted for taxes (which again, you cannot know what your tax bracket will be at the time you retire, so you would be completely guessing).

A dollar for dollar exchange is 100% appropriate - if you believe that your tax rate will be zero when you retire (amazing that someone who claims to be an accountant keeps making the assumption that taxes will be zero on retirement). Most of us in the real world expect that there will be a tax rate greater than zero when we retire.

The best way to do it is to divide pre-tax and after-tax assets separately. Then the division is fair - regardless of how high or low the tax rate might be on retirement.

If that's not possible, then you should negotiate some value with your stbx. There is no defined number that every court will accept since no one can predict the future - either the tax rates that will be in effect OR your personal situation). Still, it is better do make SOME adjustment than to make none at all.

You really need to work this out with your stbx. Keep in mind that it won't be perfect, but it doesn't have to be too good of an estimate to be better than zero.

For example, in my case, my marginal tax rate (state and Federal) is 40% today and probably won't be any lower when I retire. But it might be very difficult to get someone to agree to a 40% reduction in value, so I might settle for 25%. By any reasonable standards, that's closer to what you're really going to be paying in retirement than zero.

 

[justgetmeout]

It sounds like the best answer will be whatever we can agree on... likely somewhere between 0% (dollar-for-dollar) and my current tax rate.

Thank you both very much!

 

[LdiJ]

A dollar for dollar exchange is 100% appropriate - if you believe that your tax rate will be zero when you retire (amazing that someone who claims to be an accountant keeps making the assumption that taxes will be zero on retirement). Most of us in the real world expect that there will be a tax rate greater than zero when we retire.

The best way to do it is to divide pre-tax and after-tax assets separately. Then the division is fair - regardless of how high or low the tax rate might be on retirement.

If that's not possible, then you should negotiate some value with your stbx. There is no defined number that every court will accept since no one can predict the future - either the tax rates that will be in effect OR your personal situation). Still, it is better do make SOME adjustment than to make none at all.

You really need to work this out with your stbx. Keep in mind that it won't be perfect, but it doesn't have to be too good of an estimate to be better than zero.

For example, in my case, my marginal tax rate (state and Federal) is 40% today and probably won't be any lower when I retire. But it might be very difficult to get someone to agree to a 40% reduction in value, so I might settle for 25%. By any reasonable standards, that's closer to what you're really going to be paying in retirement than zero.

Misto....

A couple retires. They both receive 18k in social security and they each have a 401k that nets them 10k a year in annualized payments. That gives them 56k a year in income....which is a VERY average retirement income.

What is their federal marginal tax rate? I will give you a hint, its zero.

 

[mistoffolees]

Misto....

A couple retires. They both receive 18k in social security and they each have a 401k that nets them 10k a year in annualized payments. That gives them 56k a year in income....which is a VERY average retirement income.

What is their federal marginal tax rate? I will give you a hint, its zero.

This is an example of the way you manage to misrepresent facts. He's getting a divorce. Why are you using married, filing jointly figures? For singles, income over $32 K is taxable. Not to mention that he's talking about keeping 100% of an IRA that's already at $100 K. I don't know what his estimated SS benefit is, but mine is just under $30 K - which would make me subject to taxes even on modest investment income. You have no idea of his age. If he's in his 40s or 50s, that $100 K could easily be large enough to be generating more than $10 K per year when he retires-even using your figures. That also doesn't include state taxes (fortunately, Kentucky has a $41 K income exclusion for retired people, but not all states are as generous - and I certainly expect to be making far more than that when I retire, anyway - as do lots of people).

As I said - if someone thinks that they're going to pay zero taxes on their retirement income, they're free to do it your way. That is still consistent with my statement that everyone should consider taxes before trading pre-tax and after tax income.

If they think they WILL be paying taxes when they retire, then it is foolish not to consider it.

So, there are two scenarios:

1. They have no taxable income when they retire. In this case, both your position (never offset for taxes) and my position (consider the tax consequences) are valid.

2. They have taxable income when they retire. In this case, my position (consider the tax consequences) is valid and yours is not. I expect to be earning enough to be paying a lot of taxes when I retire (even if taxes don't go up - and most people think they will) and your advice would badly shortchange me.

It's really incredible that you keep trying to shove your position down people's throats when it is CLEARLY only valid for the subset of the population that will have no taxes when they retire. I thought that a financial planner was supposed to consider all the possibilities instead of using a 'one size fits all' approach for everyone.

 

[LdiJ]

This is an example of the way you manage to misrepresent facts. He's getting a divorce. Why are you using married, filing jointly figures? For singles, income over $32 K is taxable. Not to mention that he's talking about keeping 100% of an IRA that's already at $100 K. I don't know what his estimated SS benefit is, but mine is just under $30 K - which would make me subject to taxes even on modest investment income. You have no idea of his age. If he's in his 40s or 50s, that $100 K could easily be large enough to be generating more than $10 K per year when he retires-even using your figures. That also doesn't include state taxes (fortunately, Kentucky has a $41 K income exclusion for retired people, but not all states are as generous - and I certainly expect to be making far more than that when I retire, anyway - as do lots of people).

As I said - if someone thinks that they're going to pay zero taxes on their retirement income, they're free to do it your way. That is still consistent with my statement that everyone should consider taxes before trading pre-tax and after tax income.

If they think they WILL be paying taxes when they retire, then it is foolish not to consider it.

So, there are two scenarios:

1. They have no taxable income when they retire. In this case, both your position (never offset for taxes) and my position (consider the tax consequences) are valid.

2. They have taxable income when they retire. In this case, my position (consider the tax consequences) is valid and yours is not. I expect to be earning enough to be paying a lot of taxes when I retire (even if taxes don't go up - and most people think they will) and your advice would badly shortchange me.

It's really incredible that you keep trying to shove your position down people's throats when it is CLEARLY only valid for the subset of the population that will have no taxes when they retire. I thought that a financial planner was supposed to consider all the possibilities instead of using a 'one size fits all' approach for everyone.

The bolded it "pot calling the kettle black". You don't merely suggest that people consider the tax consequences, you insist never exchange retirement assets for other assets on a one to one ratio.

The entire point that I am trying to make is that no one has any idea what their tax bracket is going to be when they retire, unless they are already near retirement. Even you don't know. You think you know, but in reality you have absolutely no idea, because you cannot predict the future. In addition the "small subset" isn't your average guy in retirement...its people like you.

I do tax returns for a hundred or more retired people, in all kinds of different socio-economic brackets and I have yet to see ANYONE have annual SS benefits of greater than 24k, and its rare for benefits to even hit 20k.

100k in retirement assets does NOT annualize to "much more" than 10k a year of retirement income.

Your figure of 32k is also incorrect. On top of that the vast majority of people remarry.

Basically, what you are telling people to do is to spend a lot of legal bucks fighting over something that they have no idea what the correct answer is...and on top of that the judge also has no idea what the correct answer is.

Since the correct answer could be 0% all the way up to about 40%, with every possible number in between (and that allows for absolutely no changes to the tax code between now and the age of retirement), and the vast majority of the population are going to be somewhere between 0 and 15%

What is the future value of possibly 10k in legal fees now fighting over something that you do not have the correct answer to? It could easily be more than the potential future taxes on the current value of 1/2 of the retirement account.



Retirement assets have shrunk considerably in these socio-economic times. There is potentially great benefit in leaving them untouched so that they have an opportunity to recover.

 

[mistoffolees]

I do tax returns for a hundred or more retired people, in all kinds of different socio-economic brackets and I have yet to see ANYONE have annual SS benefits of greater than 24k, and its rare for benefits to even hit 20k.

100k in retirement assets does NOT annualize to "much more" than 10k a year of retirement income.

Your figure of 32k is also incorrect. On top of that the vast majority of people remarry.

Basically, what you are telling people to do is to spend a lot of legal bucks fighting over something that they have no idea what the correct answer is...and on top of that the judge also has no idea what the correct answer is.

I'm sure glad I never gave you my accounts to handle. Let's see how many errors I can find:

1. I don't know whose returns you're doing, but I just received a statement last week. My estimated SS benefits are $2487 per month if I retire at the normal age (more if I retire later). So who should we believe - you or the Social Security Administration?

2. You're assuming that the person's IRA doesn't grow before retirement. Since you have no idea of what is age is, how in the world are you projecting his retirement income from the current value of $100 K? If he's retiring tomorrow, it could be much less. If he's 20 years from retirement, it will be much more. As usual, you create some scenario in your head and then insist that it applies to everyone - without bothering to get the facts of their situation.

3. Income limits. You're right - for singles, it's only $25 K (which makes your argument even weaker):
Social Security: Taxable Portion of Social Security Benefits

4. No one told him to spend a lot of money (certainly not $10 K) arguing over the matter. In fact, I specifically told him he should negotiate a value with his stbx. Funny how you can manage to come up with all sorts of imaginary costs when it supports your argument but can't even possibly imagine a scenario where someone pays tax during retirement.

5. You misquote me to try to make your argument make sense. You stated "You don't merely suggest that people consider the tax consequences, you insist never exchange retirement assets for other assets on a one to one ratio." In reality, I SPECIFICALLY SAID (see post #3) "A dollar for dollar exchange is 100% appropriate - if you believe that your tax rate will be zero when you retire ". The fact that you have to lie about what I said is a pretty good indication of how weak your argument is.


Just admit that you were wrong. Your argument only makes sense if the person is sure they will be paying zero taxes in retirement (AND if they don't need to withdraw the money before retirement for some reason). The only rational position is to consider the tax consequences of swapping pre-tax and after-tax income. If you're offering that advice to your clients, you are not giving them good advice. Period.

 

[LdiJ]

I'm sure glad I never gave you my accounts to handle. Let's see how many errors I can find:

1. I don't know whose returns you're doing, but I just received a statement last week. My estimated SS benefits are $2487 per month if I retire at the normal age (more if I retire later). So who should we believe - you or the Social Security Administration?

Dude...that's you...and that's you NOW. That's you ignoring the fact that there is active legislation to make SS benefits "means tested".

2. You're assuming that the person's IRA doesn't grow before retirement. Since you have no idea of what is age is, how in the world are you projecting his retirement income from the current value of $100 K? If he's retiring tomorrow, it could be much less. If he's 20 years from retirement, it will be much more. As usual, you create some scenario in your head and then insist that it applies to everyone - without bothering to get the facts of their situation.

That's total BS. That completely bolsters my argument as to why someone would want to preserve their retirement assets by exchanging them for current assets.

3. Income limits. You're right - for singles, it's only $25 K (which makes your argument even weaker):
Social Security: Taxable Portion of Social Security Benefits

However, you neglect to point out that the 25k calculation is 1/2 of social security benefits plus non social security, taxable income.

4. No one told him to spend a lot of money (certainly not $10 K) arguing over the matter. In fact, I specifically told him he should negotiate a value with his stbx. Funny how you can manage to come up with all sorts of imaginary costs when it supports your argument but can't even possibly imagine a scenario where someone pays tax during retirement.

Again, total BS. I never said that no one would pay tax in retirement, I said that no one can know how MUCH tax they will pay on future retirement savings...because no one can predict the future.

5. You misquote me to try to make your argument make sense. You stated "You don't merely suggest that people consider the tax consequences, you insist never exchange retirement assets for other assets on a one to one ratio." In reality, I SPECIFICALLY SAID (see post #3) "A dollar for dollar exchange is 100% appropriate - if you believe that your tax rate will be zero when you retire ". The fact that you have to lie about what I said is a pretty good indication of how weak your argument is.

oooh...you said that once, out of all of the posts that you have made on this subject.

Just admit that you were wrong. Your argument only makes sense if the person is sure they will be paying zero taxes in retirement (AND if they don't need to withdraw the money before retirement for some reason). The only rational position is to consider the tax consequences of swapping pre-tax and after-tax income. If you're offering that advice to your clients, you are not giving them good advice. Period.

As I have stated in previous posts, we have a whole firm of tax attorneys, CPAs, and EAs that laugh at your posts on this issue. Its not just me.

The big deal here is that someone in your actual position might have a valid reason to attempt negotiations on the subject...depending on the overall factors. However the average Joe wouldn't. The average Joe would be wasting his money.

 

[Ohiogal]

When retirement plans are split a QDRO is utilized to roll over said portion into another retirement plan. If the amount split is 100k then 50k is rolled over to the other spouse and then it grows so that at retirement they should have more than 50k. If the spouse receiving the 50k decides to cash it is then that is THEIR choice and THEY take the tax bite -- not the person whose retirement was split.

Hence OP should give 50k of his other assets to his soon-to-be-ex to keep his retirement.

In other words I am agreeing with LD but not for the same reasons. Neither Misty or LD have taken into consideration that the retirement is set up to grow. So giving 50k doesn't amount to only 50k retirement unless the people are retiring immediately.

 

[nextwife]

Because market values of various holdings within one's 401K are volatile and can swing significantly, I've never understood why the split isn't established as half of all SHARES held in each fund on a given date, rather than as a cash value of X dollars. Seems like that makes no sense.

Couldn't one simply transfer X SHARES of all funds held? That would eliminate any timing of the market issues with one or the other party losing out because the market dumped or increased significantly since the dollars awarded were established?

 

[mistoffolees]

Because market values of various holdings within one's 401K are volatile and can swing significantly, I've never understood why the split isn't established as half of all SHARES held in each fund on a given date, rather than as a cash value of X dollars. Seems like that makes no sense.

Couldn't one simply transfer X SHARES of all funds held? That would eliminate any timing of the market issues with one or the other party losing out because the market dumped or increased significantly since the dollars awarded were established?

I already stated that that's the preferred method - split pre-tax and after-tax accounts separately.

But in this case, they want to use a pre-tax account to offset an after-tax (home equity) asset and want to know how to offset that.

 

[mistoffolees]

When retirement plans are split a QDRO is utilized to roll over said portion into another retirement plan. If the amount split is 100k then 50k is rolled over to the other spouse and then it grows so that at retirement they should have more than 50k. If the spouse receiving the 50k decides to cash it is then that is THEIR choice and THEY take the tax bite -- not the person whose retirement was split.

Hence OP should give 50k of his other assets to his soon-to-be-ex to keep his retirement.

In other words I am agreeing with LD but not for the same reasons. Neither Misty or LD have taken into consideration that the retirement is set up to grow. So giving 50k doesn't amount to only 50k retirement unless the people are retiring immediately.

I agree - and my first suggestion was that retirement accounts should be split separately from after-tax assets. Whenever possible, I would ALWAYS split the marital equity in retirement accounts 50:50 and the marital equity in other assets 50:50.

Unfortunately, that doesn't allow them to do what they want. stbx apparently doesn't have the cash to give OP 1/2 of home equity and he's willing to take a greater share of the retirement account instead of home equity. His question is how to offset that.

 

[tiggerrick]

Would a QDRO be effective immediately on divorce and give each individual their share to do as they wish AND would your ex. be forced to move his/her share out, or could they leave their share in place?

 

[LdiJ]

Would a QDRO be effective immediately on divorce and give each individual their share to do as they wish AND would your ex. be forced to move his/her share out, or could they leave their share in place?

Most likely the receiving spouse would have to roll the money into an IRA if they wanted to keep it as retirement funds. Most employer plans don't really allow for the receiving spouse to remain within the company plan.