Headed for Divorce? Don’t Ignore Your Retirement Plans

Divorce can have significant financial implications, particularly for women, who often face the challenge of rebuilding their retirement savings. Many divorced Americans find themselves lacking sufficient funds to retire comfortably, leading to concerns about their financial future. Individuals who have gone through divorce have to navigate retirement planning amidst the aftermath of marital separation, and what is best for their business.

As a business owner, you dedicate your time and effort to building and growing your enterprise. Amidst the daily demands of running a business, it’s crucial not to overlook planning for your own retirement, particularly during a divorce. There are various retirement plan options available to business owners which have differing key features, advantages, and considerations. By understanding these retirement plans, especially before or during divorce, you can make informed decisions that align with your long-term goals and set yourself on a path to a comfortable retirement.

How to approach retirement plans when getting a divorce

There are many things to consider when planning your retirement, and even more so when you own a business. While it seems that women tackle more challenges than others, it is important that everyone who is considering or in the midst of a divorce understand exactly what will happen with your business when you choose to retire, and everything that entails.

Some factors to consider include:

• Preparing for a financial setback. Divorced individuals, especially women, often encounter financial difficulties due to the costs of raising children and the negative impact on their earnings. The shift from a dual-income household to single living brings about increased expenses and the need for careful financial planning. It is important to acknowledge the potential setbacks and challenges, and to think of strategies for mitigating their impact.
• Negotiating retirement and joint savings. Divorcing couples must navigate the division of assets, including retirement accounts, which can have long-term implications. There are various approaches to dividing retirement savings, such as considering health insurance needs, properly evaluating joint savings, and addressing tax consequences. It is important to seek professional advice from an attorney to ensure a fair and informed settlement.
• Finding financial education and support. Rebuilding retirement funds after divorce requires knowledge and support. There are resources and organizations that offer financial education and assistance, including financial planners, online support groups, webinars, and nonprofit initiatives. It is important to take advantage of these resources to gain financial literacy and make informed decisions about your retirement planning.
• A road to a comfortable retirement. Building back retirement funds is possible at any age, although older women may face more significant challenges. Some strategies for regaining financial stability include budget reviews, debt management, and retirement replenishment plans. It should be noted that older divorcees have specific needs, and securing a home and maintaining living standards through tools like reverse mortgages can be critical.

In a divorce, all assets acquired during the marriage, including a business, are subject to division. In Maryland, which follows the principle of equitable distribution, assets are divided based on what is deemed fair. As a result, it is possible for your spouse may be entitled to receive 50% of the value of your business, following a divorce. That is why prenuptial and postnuptial agreements are so important: they can avoid this unfortunate future by stopping it before it starts.

What retirement plans are available for divorcees and business owners?

• Simplified Employee Pension (SEP) IRA. The Simplified Employee Pension (SEP) IRA offers a straightforward and flexible retirement plan for business owners, particularly those with few or no employees. With a SEP IRA, you can make tax-deductible contributions on behalf of yourself and your employees. Any business owner, including sole proprietors, partnerships, corporations, and LLCs, can establish a SEP IRA. Business owners can contribute up to 25% of each employee’s eligible compensation, subject to a maximum limit. The maximum contribution limit changes annually and is subject to IRS regulations. The maximum contribution limit is $58,000 or 25% of the employee’s compensation, whichever is less. Contributions made to a SEP IRA are tax-deductible for both the employer and the employee, reducing taxable income.
• Solo 401(k) plan. Designed explicitly for self-employed individuals, the Solo 401(k) Plan is an attractive option for business owners with no full-time employees, except for a spouse. This retirement plan offers higher contribution limits and additional benefits compared to other retirement plans. To be eligible, you must have self-employment income from a business you own, operate as a sole proprietor, or have a partnership with your spouse. Solo 401(k) plans are generally available to businesses with no full-time employees, except for a spouse. However, part-time or seasonal employees who work less than 1,000 hours per year may be excluded.
• Simplified Employee Pension (SEP) 401(k) plan. Combining elements of both the SEP IRA and the traditional 401(k), the SEP 401(k) Plan provides business owners with an opportunity to make higher contributions while retaining the simplicity and flexibility of the SEP IRA.
• Defined benefit plans. For business owners seeking substantial retirement contributions and tax advantages, defined benefit plans can be an excellent choice. Unlike other retirement plans, Defined Benefit Plans allow for significantly higher contribution limits, making them especially appealing for individuals with high incomes and those nearing retirement. Contributions to these plans are calculated based on actuarial formulas that consider various factors, including the participant’s age, salary, and expected retirement date. Funding requirements for defined benefit plans are determined by actuarial calculations to ensure there are sufficient funds to meet future benefit obligations. These plans offer potential benefits for business owners, including higher contribution limits compared to other retirement plans, potential tax advantages, and the ability to accumulate substantial retirement savings. Additionally, Defined Benefit Plans can provide a reliable income stream in retirement for participants.

Planning for retirement is a critical aspect of every business owner’s financial journey. By exploring the various retirement plan options available, you can select the one that aligns with your specific business structure, financial goals, and long-term vision. Consulting with a divorce attorney can provide invaluable guidance in navigating the complexities of retirement planning and ensuring compliance with relevant laws and regulations while handling how your divorce will factor in.

How can a Fulton divorce attorney help me?

If you are getting a divorce, and are worried about the future of your business for when you retire, you should contact the divorce attorneys at McCabe Russell PA. We will advocate for your interests and negotiate on your behalf to secure a fair division of marital property, including your business. We will help you explore various options, such as offsetting other assets, buying out your spouse’s share of the business, or structuring a payment plan that allows you to retain ownership.

If you co-own the business with your spouse, we can provide additional counsel while you are drafting a buy-sell agreement. This legal document can establish a plan for the transfer or sale of your business interests in the event of divorce, death, or other triggering events. It helps provide clarity and protect your business’s continuity and your financial interests.

Don’t put it off. The best way to keep your assets and define the future of your business during a divorce is to seek the help of a divorce attorney.  If you are interested in setting up a consultation, call us or fill out our contact form. We want to help you, and ensure that you are not cheated out of your earnings or savings. We are proud to serve those in Fulton, Bethesda, Rockville, or Columbia. Let us assist in making your future what you want it to be.