Divorce Rich with Jacki Roessler, CDFA

Divorce, Taxes & the Big Beautiful Bill: What Changes Now? with Michael Brocavich, CFP®, MBA

• Season 2 • Episode 20

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Taxes changed, and so did the playbook for anyone navigating divorce, parenting costs, or retirement income. We sat down with Michael Brocavich, CFP, MBA Partner and Director of Financial Planning at the Center for Financial Planning in Southfield, Michigan, to break down what actually matters: permanent lower brackets, a larger standard deduction, a new “senior bonus,” and how credits can put cash back in your pocket when money feels tight.



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Welcome And Sponsor Message

SPEAKER_03

Welcome to the Divorce Rich Podcast. I'm your host, Jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of or considering divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing.

SPEAKER_04

Rich means many things to many people. I believe the best definition of being rich is someone who has access to many resources. Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future. That's why I want to tell you about the independent wealth management team at the Center for Financial Planning. Their team of certified financial planners specializes in helping people just like you navigate life changes with confidence. Whether it's assessing your new financial circumstances, creating or updating your retirement plan, or helping you adapt to the new normal, they'll work with you to get a clear, customized plan to feel in control and move forward with confidence. So if you're interested in working with a financial planner you can trust to have your best interest in mind and you're ready to take the next step, visit centerfinplan.com at centerfinplan.com and schedule a conversation.

SPEAKER_01

Center for Financial Planning, live your plan. Disclosure. Security is offered through Raymond James Financial Services Inc., member Fenbread, SIPC. Investment advisory services offered through Center for Financial Planning Inc. Center for Financial Planning Inc. is not a registered rubber dealer and is independent of Raymond James Financial Services. Center for Financial Planning was a sponsor of the Divorce Rich Podcast. The Center for Financial Planning and Raymond James are not affiliated with or endorsed by the Divorce Rich Podcast.

SPEAKER_04

Hi everyone and welcome back to the Divorce Rich Podcast. I'm Jackie Ressler and I am very lucky today to have as my guest Michael Bro Cabbage, who is a partner and director of financial planning at the Center for Financial Planning in Southfield, Michigan. And he's we're going to talk about something that I get asked a lot of questions about, and I really don't have the the answers. And I think it impacts everybody, whether you are going through a divorce or you have been divorced or you're considering divorce or you're you're not in the in the uh divorce realm at all. It impacts all of us. We're gonna be talking about the big beautiful bill that was passed in 2025 in July. And um Michael is gonna share with us what he thinks is are some of the important takeaways to make it easy for us lay people and how how it's gonna impact our our finances. And there's some pretty big things that happened. So welcome, Michael.

SPEAKER_00

Yeah, well, thank you, Jackie. Yeah, um I'm very happy to be here. And yeah, you're right. There are some big things in this bill, and this bill uh does a little bit of everything where it kind of extends some of the provisions that we've had since 2018. Also adds some stuff where folks uh will be able to stay save a little bit on taxes over the next few years. There's a lot of different provisions in this bill. Not everything affects everybody. Um, and the other thing about this bill that your viewers are gonna want to pay attention to is a lot of these provisions are only for, you know, during this administration, so just for the next four years. And a lot of this stuff kind of has income phase out. So it's gonna be important that they understand, you know, this income phase out, especially if their income is changing because you're going through a divorce, you know, you're used to filing jointly. And so you might have qualified for things previously with a joint income, but now you have a single income and maybe you're not able to, you know, you kind of get phased out of some of these things. So it's gonna be important that they pay attention to, you know, a lot of the tax brackets and where these things kind of phase out.

What’s Permanent: Brackets And Deductions

SPEAKER_04

So that is absolutely the last thing on anyone who's getting divorced on their mind, on their rate, I should say on their radar, is to be thinking about that. But it is really important for those of us that advise people that are going through divorce or even post-divorce on what what kind of planning they can do, which assets they want to take in the divorce. And, you know, as far as taking money out of it, depending on how old they are. And we're gonna talk a little bit about gray. A very big portion of our listeners are gray divorce, meaning people that are over the age of 50 getting divorced. And so we have some really new things that are happening with this bill that would impact them directly. When did these text changes go into effect? Is it for 2025 or 2026?

SPEAKER_00

Yeah, that's a really good question, Jackie. Actually, it's a little bit of both. So there are some provisions that go in effect this year and so are retroactive to us right now. Um and then there are other provisions that don't start until 2026. Um, so uh you have to kind of understand which ones start when they do. And also a lot of the provisions that start retroactively this year have an expiration date. So they will end at the end of this administration's term. So tax year 2028 may be the last year that you're able to qualify for some of these provisions, unless they get extended by the next administration, of course.

SPEAKER_04

Okay. Well, let's dive right in. Let's um, to me, the biggest change seems to be the um the tax deduction and tax credits. So can you give us a bird's eye view of the change in that tax bracket deduction, all of that?

SPEAKER_00

Yeah. So, you know, a lot of us probably remember back in 2018, we went through the Tax Cuts and Jobs Act, where our tax brackets were lowered, and also our everyone's standard deduction was basically doubled. So everybody got a higher standard deduction, whether you're filed single or you filed married filing jointly or ahead of household. However, you filed, you got to enjoy a higher standard deduction. So what the the new bill just extends those tax brackets. So we're gonna continue to enjoy those lower tax brackets. They were set to expire at the end of 2025. So now they've become permanent. There is no expiration date on those, which is important. All right. So those are going to remain. Also, the higher deduction for folks, that's also going to remain permanent. Okay.

SPEAKER_04

In layperson's terms, what is if I don't know anything about how the taxes work, a lot of my clients, you know, never have this is gonna be their first year filing their taxes and being aware of it because their spouse handled it. So a higher deduction means that we have that less of our income is taxed, correct?

SPEAKER_00

That's absolutely correct. So on your way that your taxes uh work is you start off with kind of your gross income. So that's everything that you've earned, all right? And then what they do, and that's your called your adjusted gross income. And then what they do is they say, all right, what can we deduct off of that before we actually tax you on your income? And that's your deductions. And for most people, they take the standard deduction, all right. And if you're uh uh if you're married filing jointly this year, it would be$31,000. If you're uh filing single, then it would be half of that. So it'd be um about a little over$15,000. And the head of household would be head of household would be the same fifteen thousand dollars.

SPEAKER_04

Okay, so if I make if I make a hundred thousand in 2025, the st well, I guess it's the the standard deduction if that was going by this year's standard deduction would be fifteen thousand. So I only get taxed on eighty-five thousand of my income.

SPEAKER_00

That is correct. That is correct.

SPEAKER_04

That's has that changed the deduction amount?

Credits vs Deductions And Child Credit

SPEAKER_00

Yeah, so that has changed. So we did have these higher standard deductions, but with this new bill, it actually increased the standard deduction by$1,000 for single filers and dollars for for other filers or for joint filers. So that did go up a little bit for everybody. Also, went what went up was the child tax credit. So that's is now up to$2,200 per child. And I think it might be important for your viewers to kind of understand the difference between a deduction and kind of a Yes, please. Yeah. So what a deduction does is it says, all right, um, this is your income. Uh we're gonna take a deduction would just take some of your income away. All right. So if you made$100,000 and you have a$15,000 standard deduction, now you're just getting going to get taxed on$85,000. Okay. So that's what a deduction does. What a tax credit does is it says, after you've gone through the deductions and everything, the IRS says, all right, you owe us$5,000 in federal tax. Well, what a tax credit does is it says, all right, you owe us$5,000 in tax, but you have a child, so now we're gonna you get a$2,000 tax credit. We subtract that off of the five grand you owe us. Now you only owe us$3,000.

SPEAKER_04

So credit is much better than a deduction.

SPEAKER_00

Absolutely. Yeah, 100%. Tax credits are definitely much better than tax deductions. You get much more bang for your buck there with a tax credit. So you want to make sure that you're looking at these tax credits and trying to take advantage of them when you can.

SPEAKER_04

So for my listeners, people that are going through divorce, this matters in terms of who you claim as your dependency exemption, right? So you can only get the child credit for a child that you're claiming as a dependent.

SPEAKER_00

That is 100% correct. Yes. So that would be important on who gets to declare that child as dependent. And if one of the parents is a, you know, after the divorce is maybe uh more on the lower income side, they might also have the ability to get a refund of that tax credit up to$1,700.

SPEAKER_04

So even if they're not paying any right. So I have we have several listeners, I have several clients, and I'm sure that there are lots of listeners here who after the divorce is over in the first few years after the divorce, they may be receiving child support and alimony, both of which are not treated as earned income. So can they benefit also from this child, the child credit, even if they don't have any taxes due?

SPEAKER_00

Yeah, they would. So um since they don't have to owe tax, what they what there is there would be a calculation where the IRS would allow them to get some of that tax credit back as a refund. And they're able to get up to$1,700 of that back. Um, it's a calculation that's kind of based off of you know the income that uh is recorded. Uh, but you know, they do have the ability to get some of that money back as a refund.

Claiming Dependents After Divorce

SPEAKER_04

Okay, that's awesome. So, Michael, I wanted to share with you that I have in most of the divorce attorneys that I work with, I'm in Michigan, obviously, like you are, and they are fantastic. And they they really know a lot. But as far as taxes go, many divorce attorneys across the country, that's not their area of expertise. And you know, their area of expertise is dealing with custody issues, parenting time, all of the complex financial issues that relate to divorce, but not tax necessarily. And I cannot tell you how many times I've had the conversation with an attorney that when they write up the judgment of divorce, they try to ch uh share the dependency exemption between the clients because they think that there's an actual financial benefit to the dependency exemption, where there used to be in a tax code where there was an actual right now, they know the dependency exemption amount is zero. So, but the real benefit here is, and and I think that this is where they're not aware of, where they can really advocate for their clients, is but the value of the dependency exemption, if you fall into the if you're in a lower tax bracket, because I know there are phase outs for, you know, if your income is above a certain level, you don't get to take that credit, the child credit. But this is where they can really be of value because negotiating for that client to take that dependency exemption is going to refund money directly into their pocket, even if they don't have any earned income up to$1,700 per kid, that's significant.

SPEAKER_00

Yeah. And, you know, um some planning that could be done there in the settlement is let's say you have uh two spouses, one spouse is a higher income earner, and the other one uh after the divorce, like you said, is just getting alimony and child support. All right. Well, the spouse that's a higher income earner, if they make over$200,000, they're not even going to get credit for that child tax credit.

SPEAKER_04

Exactly. Right.

SPEAKER_00

Because they phase out. And so it could be part of the planning. Well, let's allow, you know, let's give dependent to the other spouse with the lower income, and they'd actually be able to get some of those credits back.

SPEAKER_04

Exactly. And I think that's a r and that is I cannot remember a case that I was involved with in where that was brought up by the attorney that I was working with. Or you know, I br when I bring it up, it there's a lot of blank stares about, you know, they're just there was still a lot of attorneys are still using um tax information that they learned several many years ago related to the tax exemption amount, because you can exchange the tax exemption amount with form 8332 between you. So even if you're not the custodial parent, you can exchange that. But like you said, if your income is over 200,000, which is applicable in a lot of the cases that I work on, you don't get any benefit. So why do you need to file that form? Why why not give it to the spouse that actually can get a monetary benefit from it? They might even be able to negotiate to split that credit. If one of them one of them gets it, I'll share it with you, but at least one of us actually can claim it. So I think that's a a really important tip. One of the things that that you and I were talking about before we started recording was that if you are 65 and up, that there's an additional tax benefit over these next four years. So can you walk our listeners through what that would look like?

SPEAKER_00

Yeah, so uh this is actually a really nice benefit for seniors. So during the campaign, there was a lot of talk of no tax on Social Security. And so completely no tax on Social Security never ended up making it through the final version of the bill. Instead, what they replaced it with was what's called the senior bonus. So what the senior bonus is, is that seniors now get an additional six thousand dollar standard deduction bonus. All right. So we're already at$31,000, you know, in a standard deduction. Um, and then seniors over age$55 also get an extra$3,200. That's just already part of our current tax code. And then on top of that, now seniors will get an extra$6,000 each. Um, so if uh um somebody is married filing jointly out there, they could get up to about a$47,000 senior deduction. Um, if you're filing separately out there, you'd be able to get about half of that. So um it's a significant amount of additional deduction over the next four years. But like as you said, it does expire after the 2028 tax year.

SPEAKER_04

So if I'm if I'm 65 and up, there's a lot of people that are divorced that are 65 and up, and a lot of people that are getting divorced that are 65 and up. There's a new phenomenon that we call the gray divorce phenomenon, which is really that the baby boom generation again making a big impact on society by living longer, getting divorced, and an older age. So as far as their deduction, where do most seniors get their taxable income from? So if they're retired, where is their taxable income coming from that they would want to apply towards a deduction towards?

The Senior Bonus And Phaseouts

SPEAKER_00

Yeah, most seniors are getting their taxable income from uh deduction or I'm sorry, uh withdrawals from their IRAs or work retirement plans that they have. And when they take money out of those plans, that's 100% taxable, federal and state. They're all on Social Security. So some folks, if you make over a certain flat threshold or have a certain amount of income, your Social Security is going to be taxable. And then also there might, some of your viewers uh might still have some pension income out there. So all that income kind of rolls up into this earned income bucket that can these deductions can be used to help offset.

SPEAKER_04

Okay. So this is really a benefit for people that are middle, middle class and above, right? This is this benefit for seniors. Um Yeah, absolutely. If you don't have a lot of taxable income to be if you don't have a lot of taxable income to begin with, then this wouldn't impact you.

SPEAKER_00

Right. So um and folks that do have higher taxable income, so this would phase out at$75,000 of adjusted gross income for a single filer. So somebody that has more than$75,000 for single filer, this uh$6,000 bonus would start to phase out for you.

SPEAKER_04

So what I'm what I'm hearing you say is that these next four years are gonna be really critical. And someone like me or an average person that's not really um knowledgeable about financial planning and taxes, this is an important time for them to meet with their financial advisor to talk through what are the ways that this is gonna impact me so I can maximize the tax benefit. Because it sounds pretty tricky to me.

SPEAKER_00

It does. It does. And actually, we're taking this opportunity to try to try actually kind of re-examine the way that our uh that our clients are taking their income, trying to make sure that if we can keep them under a certain threshold, then we will in order to take advantage of these new provisions.

SPEAKER_04

Right. It's got to be so and doesn't that doesn't that impact RMDs? So RMDs out of your retirement accounts, can you explain what an RMD is for our listeners?

SPEAKER_00

Yeah, so an RMD is a required minimum distribution. So that's a required distribution that you have to start to take out of your work retirement retirement plan. So if you had a 401k, 403B, you know, whatever your plan was, even if you rolled that money into an IRA now, you have to start to take those distributions at age 73. Some of your viewers out there might have had to start at 70 and a half just because but those the ages have changed over the years. Now it's 73 and even 75 for uh for us.

SPEAKER_04

Oh, wow. I must have missed one of the updates.

SPEAKER_00

Yeah, so that was the Secure Act 2.0 increased RMDs to age 72 for younger people or 75, sorry, for younger people.

SPEAKER_04

Oh, okay. So I again that kind of it goes back to I gotta apologize, Michael, but I tie everything back to divorce. Anything financial that I hear, I tie back to divorce. So I'm just thinking that in terms of what assets you're taking in the marital settlement, if you have RMDs, that's a minimum amount that you have to take. So it could push you above that$75,000 income threshold, which would mean that, you know, maybe you want to consider taking again, it kind of it it goes back to getting advice about what part of the settlement do you want to take from, you know, in terms of the mix between retirement assets and post-tax dollars and how that keeps out.

SPEAKER_00

Yeah. Yeah. Somebody that might that might get more uh retirement assets or you know, pre-tax assets, stuff in IRAs and 40Ks, and they might have higher income during, you know, after they get to required minimum d distribution age, just because they're forced to take that money out.

SPEAKER_04

Right. Right. And that kind of goes back to what I was talking with your colleague, Nick Stefenthaler, about in terms of Roth conversions and doing so again, I I feel like this tax bill, along with a lot of the more recent tax provisions, just make things so complicated for the layperson to navigate on their own without professional expertise.

RMDs, Thresholds, And Settlement Mix

SPEAKER_00

Yeah, I I would agree. I mean, there are a lot of provisions in this bill, and there's a lot of thresholds where you start to lose those provisions. So you really want to understand it. But there is some really good opportunity there for you for folks to do some tax planning, especially seniors. Having that extra standard deduction give really gives you an opportunity to kind of look at where. Where's my income coming from? You know, we talked to you mentioned Roth conversions. Maybe can I do more Roth conversions? Do I need to do less Roth conversions because of this? Do I need to change my whole you know strategy up because now we have different income thresholds that I want to try and hit? So it makes it a little bit more complicated. Yes.

SPEAKER_04

It does. So I'm such a dork. I think that sounds like so much fun.

SPEAKER_00

Same for me. I mean, that's why I'm in this business. I mean, I love you know putting together these story problems and getting all this stuff and putting together for people and making it, you know, understandable and a way that we can actually, you know, execute on. So this we love this stuff, but it's it's it's gotta be stressful for people out there because there's just so many ch so much changes, so much at once. And it's really hard to understand it unless you really kind of under understand the tax code.

SPEAKER_04

Right. And I think it's always important to remind clients that most accountants don't do tax planning in this way. So kind of the end of the year comes, you send them your documents and they do the best that they can with what you send to them. But if you want to be very proactive and mindful about these applying certain strategies, you really have to get that input from a financial professional. Or if you're really good at it yourself and you like that, then you're but you really have to do that before the year ends and try to kind of get your strategy in place because again, that it's it's very rare, I think, to find an accountant that does tax planning with clients.

SPEAKER_00

I would agree with that. Yeah. Most uh most accountants out there aren't gonna send you a letter or call you up and say, hey, if you would have done this, you know, if you would have taken money out of your join account rather than your IRA, you would have qualified for an extra deduction or something. Unfortunately, most of them aren't gonna do that. They are filing your 1040 for you, and then that's about it. That's kind of where your relationship ends.

SPEAKER_04

Right. And neither is like a lot of people do their own taxes online with like a t a program like Turbo Tax or you know, and that's you're also not gonna get that kind of strategic help from a program like that.

SPEAKER_00

So exactly. More and more people either filing online or maybe they're going to their local community center and getting their tax return done for free, or they're going to like HR block. And a lot of that you're nobody's gonna kind of give you tax planning. So that's where you know it could be beneficial to sit with a certified financial planner and really go through your distribution strategy and kind of look at how this would affect you tax-wise and if there's ways to kind of change that strategy.

SPEAKER_04

I absolutely agree with that. And I also would want to emphasize with listeners that most financial planners don't do that kind of planning. The vast majority, I mean, so again, I have a list of questions for clients to ask when they're interviewing financial planners post-divorce. And one of the questions is always, do you actually will you do financial planning with me? Um, will you sit down with me and go over my tax strategy? And will you sit down with me and go over my, you know, a lot of them are really focused only on the investments and not the other pieces. So it's an it's important for people to understand that, that it's not just yeah, okay, check, I've got a financial advisor, I should be good with these new implementing these new tax strategies. That's a it'd be an unrealistic expectation.

Real Tax Planning vs Tax Prep

SPEAKER_00

Yeah. I mean, if you're if you're sitting with your advisor and your meeting kind of starts and ends with just talking about investments, you're really not getting into much of the strategy that's involved in financial planning and where your income's coming from, controlling tax brackets, qualifying for, you know, certain things, and just making sure that your overall retirement income strategy is as tax efficient as it can be. I mean, we can't completely avoid taxes, but we can try and minimize the amount that we pay every year. So, you know, that's where, you know, working with a certified financial professional like at the center for financial planning, because we'll we we will work closely with your CPA and kind of force them into helping us with that tax point in a way. So, you know, so we'll we'll come up with some strategies and we always run them by uh the CPA first before uh you know we confirm with the client that they should be implemented.

SPEAKER_04

Right. It needs to be a team approach.

SPEAKER_00

It does need to be a team approach.

SPEAKER_04

Sometimes the financial planner needs to drive the conversation.

SPEAKER_00

Absolutely. Yeah.

SPEAKER_04

Yeah. All right, there's one more thing I wanted to ask you to talk about before we we finish up here. There's so many provisions, but I really wanted to focus on what is important to people that are that are getting divorced or have been divorced. Can we talk a little bit about the 529 account changes? So a lot of my clients over the years, they have 529 accounts for their children. In general, in a divorce case, those are not seen as marital assets. Those are seen as an asset for the child and not part of the marital estate. But I do know that there are some clients that want to use that 529 money for other purposes, and they have a lot of money inside of the 529 accounts with the idea that they're gonna use it for something beyond the benefit of their children.

SPEAKER_00

Yeah. So in the new provision, the 529 money, the what you could use it for did expand a little bit. It's still gonna be geared more towards educational expenses, but it did expand a little bit. So for example, you can now use more of your 529 money to pay for K through 12 education. So if you have a child that's going to, you know, maybe a private school, before you could only take about$10,000 out of your$529 to help pay for that. Now you can take up to$20,000 out of$529 to pay for that. So it really helps uh uh parents out there uh funding that education. Um take it out for other K through 12 expenses, school trips or yeah, you know, you can um take things out for you know any expenses that occur uh that come out of pocket for a K through twelve student.

SPEAKER_01

Okay, that's great.

SPEAKER_00

As long as it's qualified educational expense.

SPEAKER_01

Okay.

529 Rules, K–12, CE, And Roth Moves

SPEAKER_00

And um also you have uh the ability now to use 529 money for more like testing fees. Even like for example, you know, professionals like us, we have to take continuing education all the time for our for our jobs, you know, to keep our certifications that we have. You can now use 529 money to pay for CE courses if you wanted to. So there's little things like that. And then also not within this big beautiful bill, but there was a provision in the Secure Act 2.0 a couple of years ago that I don't know a lot of people know about, but you can now convert 529 money into Roth IRA money. So that could be something that folks want to start to look at is all right, we have this 529 money, maybe we didn't we're not using it for qualified education. What else can we do with it? Well, you can convert it to Roth IRA money if you wanted to.

SPEAKER_04

Let's say that we've got um let's say that we've got a divorce case and surprise, surprise, I'm focusing on that aspect of it again. But if we have a divorce case and the couple has let's say$100,000 in Bobby's 529 account, and they didn't want to use that for you know as for educational expenses, how do they convert that to a Roth IRA? And is the Roth IRA in Bobby's name or the custodian's name?

SPEAKER_00

Yeah, that's a great question. So the Roth IRA would be created in whoever is the beneficiary of of the 529. So in this case, if it would be their child, Bobby, the Roth IRA would be created for Bobby, uh the child.

SPEAKER_04

Okay. So is this an an extra nice tax benefit? And is there is there a cost to convert it? Do they to pay?

SPEAKER_00

There's no cost to convert it, no. Um the only cost that would be is there are some states. Um so the conversion is 100% federal tax-free. All right. Um, but there are some states that don't consider the conversion as tax-free. And so there may be some state taxes. For example, Michigan is one of those states that doesn't consider it as a a tax-free conversion. So if you converted 529 to Roth, you wouldn't have to pay federal tax on it, but there would be some state tax you have to pay, but only on your earnings that were converted.

SPEAKER_04

Okay, and that's a bracket, right? And does does the child have to be a certain age to convert it to a Roth?

SPEAKER_00

No, the child doesn't have to be a certain age, but the 529 plan has to have existed for at least 15 years.

SPEAKER_04

Okay, so they have to be at least 15 years old.

SPEAKER_00

Well, the 529 had to exist at least 15 years.

SPEAKER_04

Oh, because you can right, because you can transfer it from one.

SPEAKER_00

Yeah, so you could, you know, it could have started with another student and then you can always trans you can change the beneficiary of who that 529 plan is. Um and make it to a different student, and you can do that tax-free any time that you want. But in order to qualify for the conversions, the the plan itself needs to have been around for 15 years.

SPEAKER_04

Okay. I don't know how you keep track of all these rules, Michael.

SPEAKER_00

I know. It's it's uh Trust me, we have to we talk about these things at length every week and our planner meetings that we get together with here at the center, and then also writing blogs about it. I mean, we we have to constantly keep it in front of us.

SPEAKER_04

Right. Well, it keeps you busy.

SPEAKER_00

It does keep us busy, yes. Absolutely.

SPEAKER_04

Well, thank you so much for being my guest and for sharing all this information. I think that you shed a light on things that are going to be really important to our listeners. So thank you.

SPEAKER_00

Yeah, well, thank you for having me, and I hope that your listeners got something out of this. And um, if anybody ever has any questions on this, you know, feel free to reach out to the center uh for financial planning at any time.

SPEAKER_04

And we will have your contact information in the show notes. So if anyone wants to reach out to you directly. And do you work with people only in Michigan?

SPEAKER_00

No, actually, uh we have clients uh throughout 40 states, so we can work with anybody anywhere as long as they're comfortable with you know working over Zoom or telephone and working remotely. Then yeah, we we are more than happy to assist.

SPEAKER_04

Awesome. Okay, thank you again. Have a great day.

SPEAKER_00

Thank you. You too, Jackie.

SPEAKER_02

When you're facing divorce, you deserve an advocate who understands what you're going through and who's dedicated to protecting your future. At Dawn, divorce attorneys for women. Our mission is simple: to help women move forward with clarity, confidence, and strong legal guidance. Whether you're just starting the process or feeling overwhelmed by what comes next, our team is here to support you every step of the way. Schedule a free consultation today and learn how we can help you take back control of your life. Visit women's rights.com slash free consultation video to get started.

SPEAKER_03

Hi everyone, and welcome back to the mailbag segment of the Divorce Rich Podcast. Today's mailbag segment is sponsored by Don, Divorce Attorneys for Women, a law firm for women in Michigan.

Closing And How To Get Help

Mailbag: QDRO 401(k) Cash vs Rollover

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Their contact information will be in our show notes. Today's question comes to us from a listener in Michigan. And the question relates to retirement account distribution. So a listener wrote in and asked, what are the tax consequences of me cashing in my 401k when I get divorced and getting a share of it from my ex-spouse, my ex-spouse is 401k through a quadro. So this is a great question. So once the quadro is approved and you get a you will get a letter from the plan administrator asking you how do you want the money? And so you have several different options. One option is to roll over the entire amount that you get that's awarded to you through the quadro, and you roll it over into an existing IRA, a new IRA that you want to open, or into your existing qualified plan for your own employer if they allow that. And all of those rollover options are tax-free. There's no tax due because there's no tax due on any transfer of assets between spouses after a divorce. And that's just an IRS rule for that. Now, if you decide, on the other hand, that you would like to take out some or all of the money that was awarded to you from a 401 through a quadro, you also have that option. So you any amount that you take out would be considered a taxable distribution to you. Okay. And you have to keep in mind that it's going to be subject to ordinary income taxes. Now, the fallback is usually that you're going to have an automatic 20% withholding on any amount that you take out. So if you would say, I want$10,000, I want that in cash, the rest of it I'm going to roll over. The$10,000, I want to pay off some legal fees, I want to pay off some credit card debt, and I just want to have a little buffer in my bank account. That$10,000 is not the amount you will receive. There's usually an automatic withholding of 20% in federal taxes that is sent to the federal government. So you would get$8,000 and the other$2,000 would be sent to the IRS. Now, is that the actual amount that you're going to owe in taxes on that distribution? Maybe not. So a good thing to do would be to contact your tax specialist and ask them, what is the amount that I should withhold? And that will take into consideration your total wages for the year, whatever your itemized or standard deductions are, any credits that you get, your accountant or your tax specialist can help you figure out what is the exact amount of taxes that I owe. If it's actually going to be 30%, maybe I have the plan administrator withhold 30% now and send that to the federal government. Or if it's going to be less than 20%, maybe I want them to withhold that amount. So anyway, the amount that you get that you get back in your pocket is going to be less ordinary income taxes. Generally speaking, you might know this, you are not able to access your retirement accounts without before age 59 and a half, without paying a 10% penalty for an early withdrawal. So I'm going to repeat that. If you take money out of an IRA account or you're able to take money out of your 401k account, which usually you can't do while you're still employed. But if you can, you are going to be subject to a 10% penalty for early withdrawal if you're under the age of 59 and a half. However, there are many exceptions to that rule, and they all fall under IRS Regulation 72T. And I'm going to link that in the show notes for this episode so you can look at all the exceptions. One of the exceptions for avoiding the 10% penalty would be a financial hardship. Another exception would be that you could take the money out over equal and periodic payments over a five-year period. There are all different kinds of exceptions, but the biggest exception, the one that applies to anyone listening here, is that when the money comes from a quadro, so only through a qualified plan and it's pursuant to a divorce, you have the option to take the money out and avoid that 10% penalty. That's IRS regulation 72 P2C is the uh the specific section of the tax code that allows for that. So again, you want to make sure that you do it the correct way, though. So once the money gets rolled over into an IRA, let's say you get the paperwork, you fill it out, and you make a mistake, and you say, I actually want to roll over 100% into my new IRA account. And once that happens, you say, Oh, wait a minute, I actually changed my mind. I need another 10,000. Or I meant to say, send me 10,000 and then roll over the rest of it. Now that it's in an IRA, you no longer have the option to take the money out and avoid that 10% penalty. So I always recommend when you're filling out that final distribution paperwork, reach out to your financial advisor. If you have a CDFA, reach out to them, reach out to your accountant and talk about what your short-term financial needs are versus your long-term financial goals and make sure that you fill out the paperwork correctly. So thank you for that question. If you have any question at all, we would love to answer it on a future segment of our mailbag portion of this podcast. Please email us any questions at divorcerichpod at gmail.com.

Penalties, 72(t) Exceptions, And Tips

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Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.

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Jacki Roessler, CDFA

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