Covid-19 and Retirement plans
COVID-19 and Retirements
The ongoing Covid-19 pandemic has not only outlasted most expectations, but has also led a flurry of laws being passed, which not only address public safety, but also address important financial matters. The financial aspects of these laws and their impact certainly factor into divorce matters as well. One area in particular these laws have created a lot of questions is with retirement assets, specifically 401(k)s and IRAs.
Although most retirement plans took a hit at the onset of the pandemic, that initial dip in 401(k)s and IRAs quickly bounced back and most plans have made gains. However, in a divorce matter, the value of the retirement asset isn’t the only concern, especially in light of some of the Covid-19 relief laws that have been passed. One component of the CARES Act passed in 2020 and the subsequent legislation passed was allowing individuals to withdraw funds without having to pay an early withdrawal penalty. Often times, financial struggles play a significant role in marital breakdowns, so these emerging considerations are not uncommon in many recent divorces.
While the CARES Act did allow for qualified individuals to withdraw up to $100,000 from their 401(k)s and IRAs without early withdrawal penalties, they are still responsible for the tax consequences from the withdrawal as those are pre-tax dollars being withdrawn and used. To have qualified to withdraw these funds, a person or their spouse must have contracted Covid-19, were unable to work because of lack of childcare, their employer reduced hours or shut down, or furloughed or laid off.
In these situations, where funds were withdrawn, it may seem straightforward that the money withdrawn would just lower the balance of the retirement asset and provide less to divide between the parties, but there are other considerations that can come into play as well. One area is with the tax consequences. The distribution can be spread across a three-year tax period, with one-third being included in each year. If the parties divorce, that could leave one party holding the bag for the tax repayment while both parties benefited from the withdrawal.
Another concern can arise in situations, where only one spouse handles the finances, and the other spouse may be surprised to even find out that funds were withdrawn. Although it seems like it would be a stretch, it isn’t as uncommon as you would think. This can cause added difficulties in tracing where the funds were used, because if they were not used for marital purposes, and the withdrawing spouse secreted or misappropriated them for their own benefit, then it should be addressed in any property division.
Lastly, since retirement assets are usually one of the most significant assets in a marital estate, having it depleted can further complicate settlements as assets parties once thought they could rely on to offset other assets, are no longer available. For example, buying out a house from a spouse may no longer be feasible if 401(k) dollars were hoping to be used to offset the value.
These considerations also apply, however somewhat differently if instead of a withdrawal, the individual took out a loan from the 401(k). The CARES Act also allowed for loans of up to $100,000 for qualifying individuals, which require repayment plans that could affect property division as well ability to pay or the need for spousal support in a divorce situation.
It is important to be aware of these issues that go beyond just the overall value of the retirement asset. Fortunately, at the Law Offices of Kathryn M. Wayne-Spindler, P.C. we are well versed in all financial implications regarding a divorce and can provide the advice and guidance needed to look beyond just the surface of these issues in any divorce action. Contact us at (248) 676-1000 to discuss your options.
The attorneys at Kathryn Wayne-Spindler & Associates are experienced attorneys who change with the times to meet the needs of their clients. Contact the Milford, Michigan law office of Kathryn Wayne-Spindler & Associates at 248-676-1000 for assistance. The attorneys of Kathryn Wayne-Spindler & Associates practice law throughout Southeastern Michigan including Oakland, Wayne, Washtenaw, Genesee and Livingston counties. The attorneys handle cases in Milford; Highland; Hartland; White Lake; Wixom; Commerce; Walled Lake; Waterford; West Bloomfield; Linden; Fenton; Flint; Grand Blanc; Holly; South Lyon; New Hudson; Howell; Clare; Gladwin; Houghton Lake; Higgins Lake; Houghton, Hancock, South Range and many more Michigan communities. Soon to be in Dadeville Alabama.