Dear Quentin,
I’m divorcing after a lot of heartache, and finally extracting myself from two decades of marriage that included setting aside a very lucrative career to focus on the kids, a cross-country move in between. The children are now adults, one just out of college and the other with two years remaining. I was going to try to wait that out, but think I need to get going with the divorce.
My early career 401(k)s were used as house down payments. I am happy to report that I am back to full-time work with a decent salary and medical benefits. Since I’ve only had a solid staff position for a couple of years, my 401(k) has $15,000, while my husband’s has $200,000. I will be vested in a pension in another 12 months and, if I can work for another 15 years until I’m 72, I should be good for a modest retirement.
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We have a house with $200,000 in equity and $160,000 left on the mortgage at a 4.5% fixed rate for the next 20 years. (That would amount to $380,000 in total payments excluding taxes, upkeep, insurance, etc.). It is a solid but modest three-bedroom home on a large lot that can be subdivided. (For context, one-bedroom rents in our area are higher than our $1,600 monthly mortgage.)
We have extensive credit-card debt and three monthly auto payments — $60,000. I will be requesting alimony for the next 15 years until retirement — for the years of lost earnings, career potential and standard of living while raising our children.
I’m considering keeping the house on the foundational advice of “always be a homeowner.” I also like the idea that I could eventually put it in a trust for the kids. Does it make long-term financial sense to let my husband keep his 401(k) intact while I take the property?
Or does it make more sense to sell the house, pay off our debts, divide what remains, including his 401(k), and then possibly just rent for the remaining 30-odd years of life?
Soon to be Divorced
Dear Soon,
If the choice is yours, then choose home, sweet home.
If you don’t keep the home, you would need to come up with a down payment for a new home and, presumably, you would downsize. Second, you will pay tax on your share of your husband’s 401(k). Some crude math: If you ended up with $70,000 from his 401(k), not accounting for compounding interest — from the principal and the accumulated appreciation — and $150,000 from the sale of the house, minus real-estate and lawyer fees, taxes and other closing costs, you would clear $220,000. Your home is worth $360,000 and will, I assume, continue to appreciate in value.
There are also some downsides to taking over the home: You will be solely responsible for the taxes, maintenance and mortgage, and you will likely have to refinance your mortgage at a higher rate than you have now. Divorce is all about timing, so if you can wait until interest rates have fallen, you could save yourself money. Alternatively, you could consider renting out a room, perhaps to a student.
You could approach your lender about a loan assumption and request that you be able to keep your 4.5% mortgage rate. “Many lenders may only allow a loan modification for those who experience financial hardship,” according to equity-tracking platform House Numbers. “However, if you can show them enough reason to allow a loan modification for a divorce or legal separation, some lenders are accepting of this request.”
“If you need to remove your ex’s name from a mortgage without refinancing, you could request a quitclaim deed (a legal document that allows you to transfer interest in real estate as a grantor to a grantee),” the company adds. “In this situation, you are asking that your ex-spouse sign the quitclaim deed in front of a notary. In turn, the ex-spouse’s name would be removed from the property deed and they give up full control of their rights to the property.”
However, you may not have a choice as to how you split your marital assets. Your husband’s lawyer could recommend splitting everything down the middle — including the house. In a community-property state, you typically divide marital property 50/50, which will include the contributions to and the appreciation of your husband’s 401(k) during your marriage. In an equitable-distribution state, marital assets are generally divided equitably, if not always equally. The judge would likely take your 401(k) withdrawals into account.
Pay off your credit-card debt
Your first priority before you divorce: Pay off your credit-card debt. You are throwing money away. The average percentage rate on credit-card debt currently hovers around 22%, while inflation is running at 3.4%. It’s a no-brainer. More important, look at the reasons you and your spouse ended up with tens of thousands of dollars on your credit card, and endeavor never to make the same mistake again if you can avoid doing so.
I asked a divorce attorney for their perspective on your situation. “This is a complicated question with a lot of moving parts,” says Brett Ward, partner and co-chair of the matrimonial and family law group at Blank Rome in New York City. “First, retirement funds will be taxed upon distribution at ordinary income-tax rates (although the money inside the retirement account grows tax-free). So the $200,000 therein is not really worth $200,000 cash.”
“That being said, the gain on a home will be taxed too, but that assumes there will be appreciation and the profit after costs exceeds your $250,000 exclusion (assuming you are eligible for it),” he adds. “In your circumstances, it seems highly likely that the home dollars are worth more than retirement dollars. So if there is an offer to let you keep the home and your husband keep his retirement, I would strongly consider taking it.”
“If you sell the house to pay off the debt and receive retirement assets as your distribution, you end up with less money — based on the tax issues set forth above,” Ward adds. “But the major question becomes whether you can service your share of the debt.”
A word of warning: Alimony may not be the gravy train — however well deserved — that you expect it to be. Rules vary by state. In California, the “rule of 65” states that if your age at the time of your divorce plus the number of years you were married is equal to or more than 65, the divorce court could order your husband to pay alimony indefinitely. If you lived in New Jersey, however, when your (former) spouse reaches his full retirement age, alimony payments could come to an end. (There are some exceptions to this rule.)
But your legal restrictions will also be compounded by your financial ones. “What you should do will be governed by what you can afford post-divorce,” Ward says. “But if your income can cover your debt payments and other expenses, I would recommend keeping the home as your distribution of assets. This also opens up opportunities to subdivide the property down the road and/or rent the property in the future as an additional source of income.”
That’s two for two. We’ve gotten you this far — now it’s up to you to do the rest. One final note: It’s noble and natural that you would wish to leave your home in trust to your children, but divorce is like going through a recession — sometimes, even a Great Recession — so make your own financial independence and housing situation a priority for a comfortable retirement. You may not have the luxury of being able to leave a significant inheritance for your children, however much you want to do that.
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