Let’s say that Spouse A and Spouse B have been married for a decent amount of time, but due to significant problems in their marriage they are seriously considering getting divorced. Here’s their high-level financial summary:

They have $100,000 in equity in their home.
Spouse A has $100,000 in their 401k account.

The biggest financial question is what to do with the house and 401k account. As I understand it, there are two main options:

Option 1: Sell the house and the two spouses split the profit, $50,000 each.
Option 2: One of the spouses keeps the house and refinances the principle that remains, plus half of the equity to pay the other spouse their share.

In both of these options, I assume the couple would split the value of the 401k account. What about another option?

Option 3: Spouse A decides they don’t want the house, and is willing to give up their share of the equity in the house ($50,000) in order to keep the entire value of their 401k account. This option preserves the equitable distribution of assets ($100,000 each) and helps Spouse B to afford to refinance the principle of the house on their own.

My question is: Is Option 3 a wise financial decision for Spouse A and B? Is it better or worse than the other options for either spouse? What’s your take on the whole thing?

Whatever you decide, try to do it without pitting two lawyers against one another. You and the soon to be ex are the ones who lose....the lawyers profit.

I would think making a clean split (selling the house) would be the way to go if spouse B can't afford taking over the house and bills.

She's entitled to part of that 401k account as well.

Option 3 makes perfect sense to me, assuming it's what both wish. And by all means if the process can be kept civil and avoid lawyers you both come out ahead.

I have a friend who is a divorce attorney doing mostly high dollar divorces like docs and he never fails to be amazed listening to the couple argue over something as trivial as a piece of furniture or lamp while he and the other lawyer at a combined cost of $400+ sit back and wait.

However you split it, make sure your name is off the loan (that would require a refinance, not just off the title with an agreement for the other to pay the loan). That would require the spouse that keeps the house to be able to qualify on their own.

quote:

Originally posted by Chris17404:
Let’s say that Spouse A and Spouse B have been married for a decent amount of time, but due to significant problems in their marriage they are seriously considering getting divorced. Here’s their high-level financial summary:

They have $100,000 in equity in their home.
Spouse A has $100,000 in their 401k account.

The biggest financial question is what to do with the house and 401k account. As I understand it, there are two main options:

Option 1: Sell the house and the two spouses split the profit, $50,000 each.
Option 2: One of the spouses keeps the house and refinances the principle that remains, plus half of the equity to pay the other spouse their share.

In both of these options, I assume the couple would split the value of the 401k account. What about another option?

Option 3: Spouse A decides they don’t want the house, and is willing to give up their share of the equity in the house ($50,000) in order to keep the entire value of their 401k account. This option preserves the equitable distribution of assets ($100,000 each) and helps Spouse B to afford to refinance the principle of the house on their own.

My question is: Is Option 3 a wise financial decision for Spouse A and B? Is it better or worse than the other options for either spouse? What’s your take on the whole thing?

Option 3 is what we did.

You can get bogged down in minutiae trying to figure out the numbers. For example, what is the cost to sell the house? Appraisal, real estate commission, maybe some others. The 401k (if traditional not Roth) will have tax implications on withdrawal of the money, but you have no idea what the tax rates will be when you retire.

So you might claim that the house is really worth something less than $100k net. And the 401k is worth less, too. But by how much?

And then there is the potential growth in value of each. While nothing can be certain, you might guess that where you live the real estate is priced at the top of a wave or at the bottom of a wave.

What we did was just ignore all of those details and said the current value is equivalent.

In my opinion, keeping the 401k intact is a better deal than splitting it up. Taking money out will likely mean a much lower final net worth at retirement, or a lower available spendable cash at retirement. First, you'll likely have a hard time replacing the money in the 401k, and secondly people who stay in the house will frequently be overloaded with the mortgage and other costs, making less money available to put into their own retirement savings.

Our mediator listed all the accounts on a big white board, with mine on one side and wife's on the other. Then she pointed out that while my cash appeared greater, my ex was getting an equivalent value in the equity of the house. I think this is a valid yet imperfect way to look at it. If your goal is to get as precisely to 50/50 asset split, you would go with either Option 1 or 2.

On a personal note, for me keeping my 401k intact was a huge emotional issue. One of the significant marital issues revolved around retirement savings, so to have her raid half my 401k would have been infuriating on top of all the other things she did to stab me in the back. These emotional issues are, I think, quite valid considerations.

And my ex wanted to keep the house for several good practical as well as emotional reasons. Numerically she came out with less than I did, but we both got what we wanted.

What you might want to consider is that the 401K asset is a before-tax asset, and the equity in your main home is an after-tax asset. In addition, there are significant selling costs and transfer taxes of selling a home. A $100,000 in each asset as they sit is not really $200,000 cash-in-pocket. A "fair" split would be 50% of each. But there are lots of options...it's really whatever the couple can agree to. When they don't agree, a judge gets involved and the female/male split is rarely 50/50.

To clarify, the tax rate on a 401k at withdrawal would likely be higher than the commissions and fees on selling the house. Let's guess 20% taxes vs 6% commissions.

At first blush the 401k looks to be worth less than the house. But we don't want that cash today, we want it many years from now at retirement. So it will grow tax free until then.

The house value may grow, or not. If you think values are quite high today where you live, a good guess may be that the value will not grow quickly and might decline even over a long period. Conversely, if you live in a growing thriving area with low real estate values, the house may increase in value very substantially.

It really comes down to how sharp a pencil you want to use in figuring out current values, and how much emotional attachment either one of you has to the house and the 401k.

quote:

Originally posted by 220-9er:
However you split it, make sure your name is off the loan (that would require a refinance, not just off the title with an agreement for the other to pay the loan). That would require the spouse that keeps the house to be able to qualify on their own.

Yes!

If you're doing the divorce without attorneys, great. But, be sure you get all the details like this covered. The goal should be to have zero ties to each other in any way after the divorce.

The bank doesn't care that you're divorced. If a loan has your name on it, you're still responsible despite the divorce decree. If your ex defaults on the loan, the bank is going to come after you, and they may well ding your credit report.

Get your name off of car loans, car titles, insurance policies, home loans, home deeds, telephones, utilities, etc.

Also, change your will, power of attorney, life insurance beneficiary, etc.

I used a lawyer to do some of the paperwork to be sure it was done properly. We didn't use lawyers to argue the divorce, and my ex never spoke to a lawyer afaik. For me, the legal fees were well worth the peace of mind to be sure the paperwork was done right.

quote:

Originally posted by Chris17404:
Let’s say that Spouse A and Spouse B have been married for a decent amount of time, but due to significant problems in their marriage they are seriously considering getting divorced. Here’s their high-level financial summary:

They have $100,000 in equity in their home.
Spouse A has $100,000 in their 401k account.

The biggest financial question is what to do with the house and 401k account. As I understand it, there are two main options:

Option 1: Sell the house and the two spouses split the profit, $50,000 each.
Option 2: One of the spouses keeps the house and refinances the principle that remains, plus half of the equity to pay the other spouse their share.

In both of these options, I assume the couple would split the value of the 401k account. What about another option?

Option 3: Spouse A decides they don’t want the house, and is willing to give up their share of the equity in the house ($50,000) in order to keep the entire value of their 401k account. This option preserves the equitable distribution of assets ($100,000 each) and helps Spouse B to afford to refinance the principle of the house on their own.

My question is: Is Option 3 a wise financial decision for Spouse A and B? Is it better or worse than the other options for either spouse? What’s your take on the whole thing?

Option 3 is a perfectly viable solution. And is often preferable if the spouses have preference for what sort of asset they want to take out of the marriage.

(This assumes you are correct about the spouses each being entitled to some portion of each asset. That question involves many facts not part of your hypothetical, and your state's law.)

quote:

Originally posted by 220-9er:
However you split it, make sure your name is off the loan (that would require a refinance, not just off the title with an agreement for the other to pay the loan). That would require the spouse that keeps the house to be able to qualify on their own.

Often this is simply not possible as neither spouse can qualify for the loan on their own. There are other solutions.

But everyone wants to save a buck, do it without lawyers, and base it on what they read on the internet. Maybe they get it right, and maybe they get it wrong, and maybe they miss some option they didn't even know existed.

I went with something similar to option 3 but also ended up with a bit of cash from the equity when the ex refinanced the house.

quote:

Originally posted by Drew136:
What you might want to consider is that the 401K asset is a before-tax asset, and the equity in your main home is an after-tax asset. In addition, there are significant selling costs and transfer taxes of selling a home. A $100,000 in each asset as they sit is not really $200,000 cash-in-pocket. A "fair" split would be 50% of each. But there are lots of options...it's really whatever the couple can agree to. When they don't agree, a judge gets involved and the female/male split is rarely 50/50.

Your scenario is a bit off. The 401K distribution probably would not be taxable under a QDRO (Qualified Domestic Relations Order) and we are presuming they have been in the house more than 18 months. They probably have though. Having said all that, I would and did choose a hybrid in that I traded some of my 401k instead of equity and kept the house.

You should create two lists of assets and liabilities that include account numbers and amounts. One list will be marital property/liabilities, and a second list will be property/liabilities that you or your spouse owned before the marriage. Then you should meet with a local (PA) family law attorney for a consultation. It is very important in Equitable distribution states to seek the advice of local counsel if you are unsure of your options. It may cost only an hour or so of billable time, but may save you some headaches in the long run.

Originally posted by rocket72:
Your scenario is a bit off. The 401K distribution probably would not be taxable under a QDRO (Qualified Domestic Relations Order) and we are presuming they have been in the house more than 18 months. They probably have though. Having said all that, I would and did choose a hybrid in that I traded some of my 401k instead of equity and kept the house.

The distribution itself from one spouse to another under a QDRO is not taxable. However - at whatever point you wish to take and use the money - it's taxable.

My point is that the scenario is (probably intentionally) simplistic. In reality, the actual present cash value that he might receive from any of the options is lower (and probably materially different) than what the question dictates...and he should consider those expenses (fees/taxes/penalties) etc. as he makes his decision.
I agree that his opinion of his home, his future retirement and future gains and losses in the housing and financial markets all play into his decision.

quote:

Originally posted by jhe888:
But everyone wants to save a buck, do it without lawyers, and base it on what they read on the internet. Maybe they get it right, and maybe they get it wrong, and maybe they miss some option they didn't even know existed.

I saw that happen once. It was a collateral docket wedged in before a jury trial I had scheduled.

Two mensa members (literally), both highly compensated individuals, were ready for the final divorce decree before she was supposed to jet off to London the next day (or next week, perhaps) for a new job with some think-tank. They had agreed on everything down to the penny and had drafted some sort of agreement re: custody of their only child. Very amicable, so it seemed, made easier because they both had incomes fairly equivalent and in excess of $250K.

Then the judge asked for the worksheets (very specific forms which are absolutely required in Maryland for particular purposes in a divorce). They looked at each other, obviously having no idea what he was talking about, and then tried to plead their case for a divorce decree since she was about to leave the country - with their child.

Oops.

It was almost embarrassing to watch.

-Rob

the only problem with option 3 is if you want to ever sell the house. If the market tanks your hosed. If you want to live there forever it won't matter.

One can argue that the market could tank as well as they are both investments but there are always swings in the financial markets. If your neighborhood starts to experience turnover and be the less desireable part of town your hosed.

quote:

Originally posted by Drew136:
When they don't agree, a judge gets involved and the female/male split is rarely 50/50.

In my experience, which is considerable, in Texas this is not caused directly by gender.

quote:

Originally posted by BurtonRW:

quote:

Originally posted by jhe888:
But everyone wants to save a buck, do it without lawyers, and base it on what they read on the internet. Maybe they get it right, and maybe they get it wrong, and maybe they miss some option they didn't even know existed.

I saw that happen once. It was a collateral docket wedged in before a jury trial I had scheduled.

Two mensa members (literally), both highly compensated individuals, were ready for the final divorce decree before she was supposed to jet off to London the next day (or next week, perhaps) for a new job with some think-tank. They had agreed on everything down to the penny and had drafted some sort of agreement re: custody of their only child. Very amicable, so it seemed, made easier because they both had incomes fairly equivalent and in excess of $250K.

Then the judge asked for the worksheets (very specific forms which are absolutely required in Maryland for particular purposes in a divorce). They looked at each other, obviously having no idea what he was talking about, and then tried to plead their case for a divorce decree since she was about to leave the country - with their child.

Oops.

It was almost embarrassing to watch.

-Rob

I've watched any number of pro-se litigants get told the court can't sign their decree. And the court can't fix it for them - that would be the judge acting as the lawyer for them which is completely improper. So they just founder around until they blunder into something the court can sign, but which may or may not make actual sense. The Texas Supreme Court tried to promulgate a set of forms for self-help divorce, but they just about make it worse, since people now can choose inconsistent or conflicting options - making it even more likely they come up with a "decree" which makes no sense at all.

I've been hired to "fix" some pretty stupid proposed decrees that the parties couldn't get the court to sign off on because they omitted some fundamental provision required to finalize the matter.

I recall one where the judge was a friend of mine, and she was so relieved when I was hired. The parties didn't need to do anything complicated from my point of view, but they had no idea how to do it, and had just fumbled around. It only cost my client about $1000, which, spent earlier, could have saved them weeks of fumbling and several appearances at which they got nothing done.

Maybe it isn't rocket science. But the family code is 300 pages of arcane rules and requirements. And then you can throw in traps for the unwary that come from other areas of law, or just from practical reality.

But everyone wants to handle it themselves and save a few thousand dollars when talking about their entire estate, not to mention their children.

Seems everyone hates lawyers right up until the point they need one...

I've made use of the bastages three times in my life and in each instance they proved themselves to be worth much more than the cost.

quote:

Originally posted by Chris17404:
Option 3: Spouse A decides they don’t want the house, and is willing to give up their share of the equity in the house ($50,000) in order to keep the entire value of their 401k account. This option preserves the equitable distribution of assets ($100,000 each) and helps Spouse B to afford to refinance the principle of the house on their own.

My question is: Is Option 3 a wise financial decision for Spouse A and B? Is it better or worse than the other options for either spouse? What’s your take on the whole thing?

I've seen Option 3 proposed and it was rejected by the judge in that case. As in your hypothetical, the value of the couple's house was roughly equivalent to the value of their retirement savings.

The judge's explicit reasoning for his rejection was that the spouse who got the house got an immediately usable asset while the spouse who got the retirement either had to wait to cash out or cash out w/ severe penalty.