In this episode: Hard assets and liquid assets both count when a marriage is divided, but they don’t behave the same way. Jon Peyton explains why the mix matters, how to raise cash during and after a divorce, and the order in which different accounts tend to be tapped once taxes and penalties are considered.
Key insights
- Everything you own is an asset, from the house and cars to jewelry, collections and the riding lawnmower. List all of it.
- Liquid assets are cash or close to it: checking, savings, CDs, brokerage accounts and retirement accounts. A pension is an income stream, but it still needs a present value so it can be counted as an asset.
- Lots of hard assets and little cash raises a practical problem: how do you pay the attorneys and fund your next chapter?
- Items may sell for less than you paid, and the other side may challenge the value you put on them.
- Each type of account has different tax treatment, so the order you draw on them matters. Retirement accounts are usually the last place you want to go.
Episode timeline
- 0:00 Introduction
- 0:34 What counts as an asset
- 1:00 Liquid assets, and why a pension needs a present value
- 2:22 Why you should list everything
- 2:56 The $3,000 riding lawnmower
- 4:06 When you have more hard assets than cash
- 5:13 How will you pay the attorneys?
- 6:19 What things actually sell for
- 7:16 How much cash you’ll actually need
- 8:16 Taxes: money that’s already been taxed
- 9:27 Savings accounts and CDs
- 10:10 Brokerage accounts and capital gains
- 12:03 Retirement accounts, taxes and penalties
- 14:39 Keeping a business by trading other assets
- 16:12 How fast withdrawals can drain a retirement account
- 17:51 If you’re the higher earner: rebuilding
- 18:48 One step at a time
The episode in brief
An asset is anything you own. The house, the cars, the jewelry, the baseball card collection, the furniture, even the lawnmower. These are hard, or physical, assets. Alongside them sit liquid assets: checking and savings accounts, certificates of deposit, brokerage accounts, credit union accounts, and retirement accounts like IRAs, 401(k)s, 403(b)s and Roth accounts.
Pensions need special handling. A pension pays an income stream rather than holding a balance, so it doesn’t look like an asset at first glance. It still needs to be counted, which means calculating the present value of its future payments.
Why list everything? You want to know how much there is to divide and what you should walk away with. If your spouse keeps the $3,000 riding lawnmower you don’t want, that value should be offset with something else of equal value. The same goes for the gun collection, the electronics, the pool table, the ATV, the beach house, the boat and the camper.
Hard assets don’t pay the bills. Jon describes a couple with $100,000 in precious metals, two cars, a house and a boat, but only $20,000 in the bank. On paper they might have a million dollars. His first question: how are you paying the attorneys? You may need to sell something or borrow against the house, and a jointly owned house usually needs both signatures.
Sale price isn’t purchase price. That $3,000 lawnmower might bring $2,000 on the secondary market, and the other side may argue for the lower number. If it’s sold, each of you might get $1,000. Work down the list the same way to see how much cash you can actually raise.
How much cash will you need? If you’ll receive alimony, you may not need cash right away, but if it won’t cover the budget you built earlier, the money has to come from somewhere. Often that means selling the house, though part of that money may go toward the next home.
Taxes change the picture. Money in checking has already been taxed. If your spouse earned the household income and $20,000 in checking is split evenly, there isn’t much left for the spouse without an income. Next come savings and CDs, which are also after-tax money, though breaking a CD early can mean a penalty.
Brokerage accounts come next. Mutual funds, ETFs, stocks and bonds must be sold to raise cash. A sale at a gain can mean capital gains tax. A sale at a loss can create a deduction that may be carried forward against future gains.
Retirement accounts come last. With a traditional IRA or 401(k), contributions may have been deductible and growth is tax-deferred, so withdrawals are taxed as ordinary income. Depending on your age and circumstances, an early withdrawal may also bring a 10% penalty. Roth accounts follow different rules. Because this money is meant for retirement and withdrawals can be costly, it’s usually the last place to look.
Trading assets can solve problems. A business owner who wants to keep the company might give the other spouse a larger share of the IRA, checking or savings to keep full ownership. It won’t work for everyone, but it can work.
Withdrawals add up fast. Jon gives an example: a stay-at-home spouse receives $500,000 in retirement assets and some alimony, but needs another $70,000 a year to cover bills. Taxes on those withdrawals could require roughly $30,000 more, so $100,000 comes out each year. At that pace, setting aside any growth, the account could run dry in about five years.
The higher earner has a different job. If your income supports you, your focus shifts to rebuilding: how much to save, where, and how fast to get your nest egg back. Season 1 returns to this near the end.
One step at a time. Learn which of your assets are hard and which are liquid, and how you’ll use each during and after the divorce. Then take the next step.
Key action items
- List every asset. Include hard assets (home, vehicles, collections, equipment) and liquid ones (bank, brokerage, retirement accounts, pensions), with a realistic value for each.
- Check your cash. Figure out how you’ll pay for the divorce itself and your first months afterward from the liquid assets you expect to keep.
- Use realistic values. Base values on what items would sell for today, not what you paid.
- Learn the tax treatment of each account. Ask a CPA or financial planner about the taxes and penalties on any withdrawal before you agree to take a particular account.
- Get a present value for any pension so it can be compared fairly with other assets.
Listen next: Episode 10: Division of Assets – It’s Not Always Cut and Dry
Jon Peyton previously held the Certified Divorce Financial Analyst® (CDFA®) designation and no longer holds it. References in this episode reflect his credentials at the time of recording.
This episode is educational and isn’t legal, tax or financial advice. Speak with your own attorney and advisers about your situation.