The term “Gray Divorce” generally refers to couples getting divorced at a more advanced age. These marriages are often long-term. In some situations, one spouse has devoted many years of their lives to the other, sometimes putting careers or their working life on hold.
Couples going through gray divorces face unique challenges when it comes to divorce, often because they are closer to retirement.
The Basics About Required Minimum Distributions
Those who are approaching 70 years old need to be concerned about required minimum distributions (RMD) and their Individual Retirement Accounts (IRAs), 401(k)s, 403(b) plans, and profit-sharing plans. The RMD requirement also applies to Roth 401(k) accounts, but not Roth IRA accounts while the account owner is still alive. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the required minimum distribution age to 72 if you reach age 70 ½ after 2020.
A required minimum distribution is an amount that you must take from your IRA or another retirement account every year. If you do not take this amount, then the amount you should have withdrawn is taxed at a 50% rate. As a result, it is in your best interest to take your RMD, or you risk losing half of that money each year.
Required Minimum Distribution and Divorce Considerations
The RMD affects gray divorces in several ways. How it affects your situation will vary based on the unique financial situation of both individuals before and after the divorce is finalized.
The couple who is close to retirement age might have to consider how the RMD will affect them when they reach age 72. In some cases, the couple might need to change spousal support when one or both individuals reach age 72 and have to start taking distributions.
The modification could go up or down—in cases where the supporting spouse will have to take RMD, that support might go up. If the spouse that is being supported has to start taking RMD, then the support that they are receiving might be adjusted downward.
Altering Property Distributions
Once RMDs start occurring, that income is taxed as if it is ordinary income. That means that it changes one spouse’s taxable income. This remains true even if the IRA is split through a property distribution.
Consider an example. Imagine that Abby and Bob are getting divorced at age 71. They decide to split Abby’s IRA into two pieces valued at $200,000 each. When Abby turns 72 the following year, she must take her RMD. However, RMD is based on the total value of her IRA, instead of the half-amount she agreed to take as part of a property distribution. Thankfully, this increased RMD will only last one year, but it can be a huge tax and income problem for some couples, especially when the RMD is a significant sum of money.
RMD and Calculating Income
One of the challenges that couples going through gray divorces also face is whether required distributions and the money you would make on an IRA could be considered a part of a spouse’s income to calculate support obligations. There is a general split of authority on this subject. As a result, it is a good idea to contact an experienced attorney to determine how this issue might affect your unique situation. Contact us for more information or to set up an appointment with a member of our team.