Joe Rosenberg, MBA, MA, CFA, CDFA; Presents – Accounting For Asset Tax Status In Property Division: Choices And Tradeoffs

Having assets with varying tax status poses complications for marital property division. Assets such as cash, vehicles and household items that won’t be sold, plus Roth IRAs, will not be taxed in the future. However, most traditional IRA and 401K retirement account assets will eventually pay at ordinary income tax rates. Most non-retirement account assets have already been partially taxed, and when sold, they will face capital gains taxes. And when selling the marital home, clients can shield between $250K and $500K of net sales gains from taxation, depending upon meeting certain IRS rules.

Financial analysts are divided on how to address these complexities. Some choose to ignore tax status because future tax rates are uncertain and decline to make “heroic” assumptions. One solution is to only split asset subtotals with equivalent tax status (e.g., pre-tax and post-tax), although the mix of assets by tax status can make this difficult Also, this simple dichotomy does not account for partially-taxed assets in non-retirement accounts. Other financials employ what is called “Tax Discounting” to render estimated after-tax values for various marital assets. In this program, we will explore the choices and tradeoffs in whether and how to account for tax status is divorce, including examples.