Why It’s Important to Account for an Asset’s Tax Status when Dividing Accounts
You’ve probably heard the expression “it’s like comparing apples and oranges.” When marital holdings are to be divided in a divorce, assets are usually not all “apples.” The following account types are treated differently from a tax perspective, which can have a big impact on the assets you receive.
- Pre-tax accounts – Dollars contributed before taxes to retirement accounts such as traditional IRAs, 401(k)s and 403(b)s are typically taxed as ordinary income when they are withdrawn.
- After-tax accounts – Assets in after-tax accounts, such as joint accounts and living trusts, are not subject to the same level of taxation as pre-tax accounts, in part because taxes have already been paid on at least some of the account’s value.
- Real estate – A piece of property may or may not be taxable when sold, making it potentially less valuable than receiving the same amount in cash.
When contemplating the financial aspects of divorce, it’s important to remember that the types of assets matter. Consider all tax implications to ensure an even split and that you are making an apples-to-apples comparison.
Need help comparing the apples and oranges of your assets? Your Journey Financial Freedom is here for you.