Fox Family Lawyers
Cynthia Moseley Fox
Attorney at Law
7751 Carondelet Avenue,
Suite 700
Clayton, Missouri 63105
(St. Louis)

Should You Take The House or the Retirement Assets in a Divorce?

Late last year, the Missouri Court of Appeals considered an interesting case where the husband challenged the property division in his divorce, whereby the court awarded him his retirement accounts while providing his wife the marital home. The husband claimed that the division was not equitable because the court didn’t discount the value of his retirement plan by the taxes that would be due should he liquidate the plan after the divorce.


The Appellant Court rejected his argument, saying that there was no evidence that the assets were to be sold imminently, and it would be “entirely speculative” as to what the tax liability would be when the assets are sold.


Choosing between the house or the retirement plan is a dilemma faced by many a spouse in a divorce because they are typically the couple’s highest value assets and have to be set off against each other to create a fair division. The choice is particularly difficult because it is often loaded with multiple considerations.


There is the practical issue of where the spouse not awarded the home will live, while giving up the marital home can be emotionally wrenching. Conversely, suddenly facing the future without a retirement nest egg can be very disconcerting for those middle-aged or older. Lastly, the selection is often influenced by financial considerations such as which asset is expected to appreciate the most in value, and which should yield the better after tax return.


Couples, as well as the court, often rely on the advice of accountants in assessing these choices. For a CPA’s point of view, let’s hear from Amelia Beckmann and Brian Witte, both principals with Ganim, Meder, Childers & Hoering, P.C., a Clayton-based accounting firm.


Amelia and Brian emphasized that the right choice will vary based on individual circumstances such as age, the growth in value (if any) that the home or the retirement plan will experience, how soon either asset would be liquidated, and what other assets and/or income each person has.


For example, if the person acquiring the asset plans on liquidating it soon after, the better selection would be the home rather than the retirement plan, assuming each was of equal value and neither was encumbered by debt. That’s because any gain up to $250,000 for a single person ($500,000 for a married couple) on the sale of a home is tax free if that person has lived in the home at least two years.


Conversely, assets in a retirement account such as an IRA or 401K, where the funds were not taxed when contributed, are taxed as ordinary income when withdrawn. Depending on the person’s tax bracket, the combined federal & state tax bite could be as much as 40%, with an additional 10% penalty if the plan is liquidated before age 59½.


However, if either asset were to be held for several years before being sold, it is possible that the tax advantages of selling the home could be offset if the value of the retirement plan grew at a much higher rate. As Amelia related, “I’ve always been told that houses appreciate less than investments.”


Brian was quick to point out that someone taking the home could still sell or mortgage it and then invest the proceeds into stocks, bonds etc. to hold for retirement. With combined federal and state taxes on capital gains currently no higher than 20%, the tax bill on liquidation could easily be less than what would be experienced when liquidating a retirement plan.


The person selling their home would likely have to fund a replacement residence, while someone mortgaging the house will have to pay interest on that debt, and these costs should be accounted for when assessing the alternatives. Similarly, the person selecting the retirement plan would presumably also have the expense of replacing the residence given up in the divorce.


Amelia and Brain saved their best advice for last. No matter your circumstance, please have an accountant or other trusted financial professional assess different scenarios before you make your choice. After all, this is a decision that you will likely live with, and possibly live in, for a long time.