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The effects of divorce on retirement plan assets

When people in Michigan begin the process of ending a marriage, they will have to reach terms about how to divide all marital assets, including retirement plans. The funds within retirement plans frequently represent a substantial asset for one or both spouses. The type of retirement savings plan determines how taxation could occur upon the distribution of funds at the completion of the divorce.

The law designates Individual Retirement Accounts as nonqualified retirement plans. The preparation of a Qualified Domestic Relations Order (QDRO) is not necessary to divide an IRA between divorcing spouses; although, the order could be executed with the other divorce documents. Regardless of the presence of QDRO, the recipients of the funds could still be liable for a 10 percent early withdrawal penalty if they are under age 59 and 6 months.

Considerations for older people wanting divorces

While divorce rates have fallen among younger people, they have increased among those who are older than age 50 over the past few decades. Michigan couples may decide to get divorced when they are older for many reasons, but it is important for them to carefully consider the potential repercussions of ending their marriages.

People who are close to or past their retirement age have added factors about which they should be concerned. If they haven't yet retired, they will have a limited number of years in which to save money before they do. People who divorce will have to divide their assets, including their retirement accounts. If they are close to retirement, they may find that they have insufficient savings to retire on time. If they have already retired, getting divorced might mean that both spouses are left without sufficient money to live comfortably.

Helpful financial tips for divorce

People in Michigan who are considering getting a divorce should be aware that the process may have a drasticeffect on their finances. However, there are certain ways they can make sure that they have the best chances of having a healthy financial future after their divorce.

Whether or not married individuals are planning to get a divorce, having their name on the deeds and titles of property they own together with their spouse is necessary if only to avoid issues with the property if the spouse dies. If a divorce is a possibility, having one's name on the legal documents as an owner can be beneficial in states that use factors such as how much each spouse financially contributed to purchasing the home and in what manner the home was used to determine who should receive it.

Retirement accounts must be divided correctly

In Michigan, some couples seek do-it-yourself divorces. While it is fine for people to file for divorces on their own, it is important that they avoid making mistakes when they have retirement accounts or pensions that they need to divide.

Couples who have retirement accounts and pensions cannot simply withdraw the amounts from those accounts and give the money to the spouses that should receive the funds. If they do, they may suffer substantial tax liabilities and be forced to pay early withdrawal penalties. By filing the proper paperwork, it is possible to transfer retirement account funds directly from the paying spouse's account to the recipient spouse's own account. The transfers must comply with the guidelines of the IRS in order to avoid tax liabilities and early withdrawal penalties.

Understanding the types of spousal support in Michigan

After a divorce, each spouse must learn how to become single again. In certain cases, one of them may need financial assistance to make the transition possible. For this reason, such individuals may receive spousal support.

Whether someone is seeking or possibly having to pay support, it is important to understand what it entails. There are a few different types of spousal support that may apply.

Tax changes could reduce alimony payments

Michigan residents who currently receive alimony may be affected by upcoming changes in federal tax laws. Ex-spouses required to pay alimony are entitled to a tax break under current law. The Tax Cuts and Jobs Act includes a proposal to eliminate the tax break, which could reduce the amount alimony recipients receive because more money will be going toward taxes.

Current law allows the person who is paying alimony or spousal support to claim it as a deduction, while the person who is receiving it claims alimony as income and pays income taxes on it. The IRS has found significant discrepancies in the amount claimed in tax deductions and the amount paid in income taxes.

The option of divorce arbitration

When people in Michigan divorce, emotions can sometimes make it difficult for them to negotiate issues such as child custody, spousal support and asset division. Working with a professional mediator or engaging in a collaborative divorce may likewise not help the spouses come to an understanding. Historically, couples that are unable to negotiate their divorces out of court may be forced into the lengthy and expensive litigation process.

Recently, another option has emerged for couples that would prefer to avoid divorce court but can't settle matters on their own. Divorce arbitration permits couples that are in need of a third-party resolution to avoid the court system. As with many other types of arbitration, the couple and their respective attorneys present their cases to a professional arbitrator that is empowered to make a binding decision regarding divorce-related issues.

How to protect assets from divorce

People in Michigan who are getting married might be able to protect their assets without creating a prenuptial agreement. This does not just protect people in case of divorce. It can also protect a person from being held responsible for a spouse's debts.

First, after getting married, people should keep their own accounts and open a separate joint account for any shared financial activity. People who own property should keep it in their own names. Any work done on property that is owned by one person and that raises the value of the property should be paid for from that person's individual account and not the joint account. Keeping records of this work and any other financial transactions is also critical. It will allow individual assets to be clearly identified as such as needed. Inheritances should be kept in individual accounts so they are not treated as marital property.

How to handle a spouse hiding assets

Michigan residents who are about to go through the divorce process may be bracing for the worst. It isn't uncommon to worry about a spouse hiding assets or taking other unsavory actions during this process. However, it is possible that a spouse is taking steps that a judge may frown upon. Therefore, it is a good idea to get as much information about marital assets as possible.

This may mean documenting the name of any financial institution listed on a letter or other correspondence. It may also mean taking notes about any communication that a person has with his or her spouse. Such evidence may be useful to legal counsel during settlement talks or a divorce trial. It is important to note that marital assets may be distributed in an equitable manner when a marriage ends.

Be practical and prepare yourself if divorce is unavoidable

If you have entered pre-divorce territory, you have accepted the fact your marriage is going to end. You may be glad, sorry or have mixed emotions. In any event, you do not want to feel overwhelmed by whatever lies ahead.

When divorce is inevitable, you want to face it with dignity. You want to be in control. Doing some pre-divorce planning will help you achieve those goals. Here are a few tips that will give you a head start.

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