When Is A Dollar Not A Dollar?

As a financial advisor, I think one of the most confusing aspects of money is that not all of it works the same way. This becomes much more apparent in the divorce process for property distribution. Many of my clients are surprised to find out that often times a dollar in one account is not the same as a dollar in another account. What does that mean? Depending on the account where the dollar is held it could be treated differently in the following aspects:

  • Liquidity
  • Taxation
  • Growth/loss potential
  • Early withdrawal penalties

Let’s use a hypothetical case where a couple has $100,000 split between two accounts – a money market account with $50,000 and a 401k account with $50,000. In a divorce negotiation, it may make sense to say that one party gets the 401k and one party gets the money market account. That way both parties have $50,000 and everything is equal.

However, when we break it down a little further, we find that these assets aren’t equal at all. For the money market account, it’s easy to access the money and there are no penalties or waiting periods to do so. How about the 401k? If the individual is under 59 ½ years old, we may have a problem. Typically, the amount you take out of your 401k is going to count as taxable income and then Uncle Sam is going to charge you another 10% as an early withdrawal penalty. After all is said and done, you may only get 65 cents on the dollar!

Then let’s consider what happens if there is a major fluctuation in the stock market between the time that your settlement is negotiated and the time you want to access the money. We have seen the market drop by 10% in two separate months in 2018. What if your $50,000 drops to $45,000 and then you still have to pay taxes and penalties to access the money?

The same goes for real estate: How do you access the equity in real estate?

  1. you can sell the property, but who knows how quickly you can find a buyer and what if you can’t get the price you think the property is worth.
  2. you can take out a home equity loan, but now you may be paying $1.06 to use a dollar. How do realtor sales fees impact the equity in your home?

The bottom line is that all dollars aren’t created equally and if you are going through a divorce, it would make all the sense in the world to hire a financial advisor to make sure you are getting every dollar that you are entitled to.

— Josh Rothbard, AIF, CDFA

About Josh Rothbard

Josh Rothbard, a Registered LPL Financial Advisor and Insurance Broker helps create financial plans to keep more money in his clients’ pockets. He customizes strategies to meet the needs of his clients and assists with income protection planning, business succession planning, estate and retirement planning, life insurance, and more. Josh is the Chairperson of the Philadelphia Divorce Alliance and a member of the Collaborative Law Professionals of Southeastern Pennsylvania.

Click here to learn more about Josh Rothbard.