Q&A: Dividing assets during divorce proceedings

April 3, 2009

Is it better to give away half of my $1 million retirement plan or keep the entire plan and give $500,000 of other assets?

Q: I am divorcing my husband, but my accountant and divorce attorney are giving me contradicting advice on dividing my assets. Is it better to give away half of my $1 million retirement plan or keep the entire plan and give $500,000 of other assets?

A: Some advisers believe that because the retirement plan is usually pretax money and will eventually be subject to income tax, it is less expensive to give away an asset that is subject to future liability-in this case, the payment of income tax. Other advisers believe that although the retirement-plan assets will be subject to income taxes many years in the future, because the monies grow on a tax-deferred basis, the ability to avoid tax over decades exceeds the cost of eventually paying income tax on the money. Since determining future tax rates and your income tax bracket in the future is impossible, there is no clear-cut answer to which is better.