A Cautionary Tale

A colleague was working with a client who had quite a unique situation. The settlement agreement had Husband (H) paying an amount to Wife (W) to equalize the asset division. The CDFA® suggested a QDRO to transfer from H’s 401k to W’s 401k and then she would have been able to do a Roth conversion with little or no tax due, since she was already in a negative tax liability situation. (caused by other circumstances)

Instead the attorney wrote in the agreement that H would pay W x amount. H took a distribution from his 401k and gave W a check for the amount. This attorney cost both H and W a lot of money because he thought cash was king and he didn’t know what he didn’t know.

H had to pay penalties and taxes on the distribution he took from his 401k. It could have cost H less and W could have gotten more money if he (legally) hadn’t paid penalties and taxes for the 401k distribution. W received the money, but not in her 401k account and thus she didn’t have the opportunity to convert it into a Roth account with tax-free growth for the rest of her life. The only winner here was Uncle Sam.

Granted this was a complex situation and If you don’t understand any of the above you are not alone. The takeaway is that this particular attorney cost both his client and her husband a lot of money. You need someone on your team who understands the intricacies of finances. And you need them to look at the settlement before it is filed.

About the author:

Bev Banfield is a CPA, Certified Divorce Financial Analyst^®, and founder of Banfield Divorce Financial Advisors. The Denver-based company was established to help divorcing couples more easily and equitably separate their finances. Banfield has more than 30 years of experience in financial analysis, budgeting, and auditing. Contact us for more information at (303) 482-1726 or bev@bbdfa.com. Connect with Bev on LinkedIn https://www.linkedin.com/in/bbanfield/