OUR GUEST – TRACY BYRNES, UBS
Welcome to another episode of the exEXPERTS DIVORCE etc… Podcast where we give you all kinds of information and tips on everything divorce. Why? We’ve lived it, so we get it! We’re Jessica and T.H.
Jessica: Today we’re so excited to have back with us yet again, Tracy Byrnes, financial advisor and Certified Divorce Financial Analyst (CDFA) at UBS. Today we’re going to be talking all things retirement. So thanks for coming back, Tracy.
Tracy: I’m thrilled to be here. You guys are covering such important stuff, so what you’re doing is amazing. I’m happy to be here.
Jessica: Yay. Thanks. I mean literally, there’s so much to talk about with retirement. I know we’re probably not going to get through everything today, but where should we even start? Do we start with what some of the different types of retirement accounts are that people probably have heard of?
Tracy: For sure, or really even before that. Even if you’re thinking about divorce, it wouldn’t be terrible to start poking around and asking some questions about what you have. This is like all the other conversations we had, it’s super important to know your financial situation, truly, before you go through the process. If you’re in it already, there’s nothing you could do, but if you are in the early stages of it, figure out what you have. Does someone have a 401(k) at work? Do we have IRAs? Are they rolled over from a job? We’ll talk about what all these things are. Does someone have a pension account at work? You’ve got to know all this, because it will come up and it needs to be split in most cases during the divorce process.
T.H.: So what are the different terms for retirement accounts? If you’re asking these questions, what are the different terms that could come up that are equivalent to a retirement account?
Tracy: Right. Let’s start with your 401(k) or your 403(b) if you work for a school or the town or something like that, it’s the exact same thing. Whether you or your spouse has one, it all becomes part of the marital assets if indeed you were at these jobs while you were married. If part of it is from beforehand, that part might be lopped off and not included in the division of property. But while you’re married, you’re both working, and you’re both putting money into these things. So basically, the company takes a little money out of your paycheck, pre-tax, so it’s not taxed, and it’s put into a retirement account for you. It could be invested in anything you choose, and this is fodder for a whole other podcast, because most people don’t even know what their 401(k) money is invested in, and you really should know. But that said, it’s generally invested into mutual funds, and oftentimes companies match up to a certain percent. So if you put say 6% of your check in, many companies will turn around and say, then we’ll give you 3% of that as a match. So that’s your money that goes to it all and that’s all part of it. That’s your 401(k) and your 403(b). Oftentimes, there’s pension plans at work too. Those are sort of becoming the way of the dinosaur and not as many companies are doing that as much. But if there is a pension plan, it means your company puts money away for you over the course of your working lifetime. You don’t see it, and you probably get some spreadsheet that you throw out and you haven’t paid attention to. It grows, and when you hit retirement or leave, depending on what comes first, you get this chunk of money. Fabulous. But again, you don’t see it, and you don’t have much to do with it. That is all the company’s generosity.
Jessica: So just really quickly, what is the difference then, at the end of the day, between a 401(k) or 403(b) vs. a pension? They’re still both things where your company is putting money away and then you get it at the end. How is it different?
Tracy: It’s truly company specific. Your company does not have to offer a 401(k) or 403(b) plan and it does not have to offer a pension. These are just benefits they choose to give you. Those are all employer sponsored plans. Then you have things like an IRA, an Individual Retirement Account, and that is something you can save for without actually having to get your employer involved. In some instances, you need to have some income, but it is separate from your job. It has nothing to do with your boss or your employer. It is you deciding to save some money on the side, and again, it’s tax free money. Putting money in these things is a really good thing because when it time comes to pay your taxes, that piece that you put away is not taxed. It’s a really good thing. You don’t have to deal with the tax till you retire. When you retire you pay tax on it, but then it grows tax free, so that’s why these retirement vehicles are super important. One, to know you have them, and two, to take advantage of them. They help your tax situation and they certainly help your nest egg in retirement.
T.H.: What is retirement age?
Tracy: That’s a great question, T.H.. It really depends on you. 59 and a half is generally when you can start taking from a lot of these things. 72 and a half is a requirement for an IRA, you have to start withdrawing. It truly depends on the plan and what you have money in. Sadly, in this day and age, it probably behooves you to work as long as you can. Later on we’ll talk about Social Security and how that is one, affected in divorce, and two, is truly affected based on when you start taking it. The difference between dipping into your Social Security account at 62 versus 70 could be $100,000. Who knows what it could be depending on how much you’ve worked. So the longer you can put that stuff off, the longer it has time to grow and get to be a real nice chunk of change for you and that way you’re comfortable in retirement.
T.H.: And then just to be clear, so at 59 and a half, if that’s what my retirement fund allows, I can take that money out tax free?
Tracy: You start to take distributions. Let’s say your 401(k), at 59 and a half, you can start taking money, it comes out, and now it’s taxable. It grew all those years, you didn’t pay a dime, and if you put it in like high flying tech stocks, you made gobs of money. God bless you, I hope that’s true. Then you have to take it out in retirement. Now, here’s the thing. The rationale behind this, moons ago, was that in retirement, the thought is you’re going to be working less. You’re not going to be on this high powerhouse career path anymore, so your tax rate should be lower. The idea being all those years you’re making gobs of money and you’re doing fantastic, hypothetically, we don’t want to hit that tax rate. Let’s wait till we retire, hopefully we’re in a lower tax bracket, and let’s pay the tax on it then. It saves you some money over your lifetime. Now, here’s a glitch though. We’ve talked about the Roth IRA before, lots of people actually end up in a higher tax bracket in retirement, because they’ve done a really great job of saving. They have all this money, and now they’re going to start using it and playing and taking the cruise around the world and all the money starts to be withdrawn. A Roth IRA is after tax dollars. That means your money goes in your paycheck, your company takes all the taxes out that it needs to, and the amount you have at home from that pile of cash is what you put in a Roth IRA. That means taxes were taken out on that dollar already. You put it in a Roth IRA, that thing grows out infinitum until you’re ready to take it. Interest, dividends, you name it, all appreciation, and when you pull that out in retirement, there’s no tax. It is your money.
Jessica: Can anyone do a Roth IRA?
Tracy: Yep, up to certain incomes. You have certain income limitations of course, but yes. It’s a great savings vehicle, especially, for instance, you can roll an existing IRA into a Roth, which would mean that current year you have to pay taxes on all the money you put in the IRA, but it’s been a year like this, where maybe you don’t have as much income. Maybe you’re willing to take a little extra tax hit just because of where we are in this world right now. Then you have the opportunity to let that money grow completely tax free. The other cool thing is that money can just be passed on to the next generation. You don’t have to pull anything out of a Roth. It could just grow and be passed on, and it’s a beautiful vehicle.
T.H.: So why wouldn’t everybody do a Roth IRA?
Tracy: They’re not offered in a lot of – some businesses now are offering Roth 401(k), it’s the same thing, awesome. Look into that if you have it. There are income limitations on some as well so you might make too much money and be priced right out of the thing. So really look at your situation, ask your advisor, what’s the right vehicle based on your tax situation, but truly try to understand what you have and what your options are going forward.
T.H.: So if you’re collecting alimony and child support, alimony is considered income, correct? [Mmhmm] So let’s say you don’t have a job right now, you’re on unemployment, you’ve lost your job during COVID, or you’ve just lost your job, but you’re still getting alimony and child support. Then in this current circumstance, you could probably qualify – Oh, so you won’t qualify for a Roth because you’re not making enough money?
Tracy: And you don’t have enough adjusted gross income, that’s earned income you need. Also, to doing it, be careful what you wish for too, because you need the money to live on and then you have to be able to pay tax on it too. So let’s really think this through. It sounds like a beautiful idea, but really talk to someone about it before you go dumping everything into a retirement account.
Jessica: I know that a lot of people know that when it comes to retirement accounts, regardless of what kind you have, there are penalties when you take money out too soon, so to speak, or later. Sometimes people choose to make those decisions. They’re buying a house, they’re doing something, and it’s worth it to take the penalty to be able to pull that money out.
But just out of curiosity, are there penalties if the reason that you’re taking the money out has to do with divorce? You’re getting divorced and now you need that extra money. Or does that not apply?
Tracy: So this is a great question. Here’s like this big mumbo jumbo thing that you’re going to hear, it’s called the QDRO. Those are the four initials of a Qualified Domestic Relations Order. This thing is something your attorney is going to help put together for specific retirement assets. They need to be split up under the law. If you have an IRA, you guys can just split that however you want. It can be however you decide, but there are certain things and there’s a list, and I’m going to read them to you. A 401(k), a thrift savings, some companies do have thrift savings, some profit sharing plans, and some defined contribution plans, depending on what you have pretty much based on your employer, those things need to be split by a Qualified Domestic Relations Order. That just means when your divorce agreement has been written up, this QDRO thing is also a part of that, and it will determine how those specific retirement assets are split. Now, the really cool and important thing here to know is there is typically a 10% penalty on early withdrawals from a 401(k). Let’s just use that as an example. You always owe tax because you haven’t paid tax on this money yet, so no matter what, you’re going to owe tax. If you pull it out too soon, and look, it’s your money, life happens. I don’t begrudge anyone for having to take a hardship withdrawal; you got to do what you got to do, but sometimes there is this 10% penalty. If you say, look, I just ran my credit card bill up, I just want to pay it off; you’re going to get dinged. If in the midst of this QDRO separation, so you have this QDRO determined and the courts decided you’re going 50/50 on this, when your 50% comes to you, if you say I really could use some extra cash, I’m getting a new place to live, while you will always owe the tax, they will waive the 10% penalty, but you need to do it in the midst of the conversation. You can’t switch up, separate everything, and then go back and say, hey, you know, I realized I really could use some money. Can you waive that fee? [Now it’s too late] They’ll say, no. You’ve to have this simultaneously so think this through when you’re sitting there with your attorneys and figuring out, okay, we’re going to split his 401(k), let’s use his for historical purposes, his 401(k). I get 50% of it, you know, I really think I could use 20 grand. The 20 grand comes to you, they’re going to withhold tax on it for sure, but you don’t have to owe that extra 10%, $2,000 penalty. It’s really important to just ask those questions, can I take this out and avoid penalty? That’s all you need to do.
Jessica: Right. So one of the things that we talked about earlier was that you had said that there are some really practical, easy, small things people can be doing as part of their everyday life that really is a great way to put money away without even thinking about it. You had mentioned there are apps where you can buy fractional shares and then there are apps where you can round up purchases so that the extra pennies go into savings. Talk to us a little bit about that stuff.
For people who either don’t have a job right now, and their income level doesn’t fit whatever these different plans are 401(k), SEP IRA, or any of that, and they’re just like, how can I just start saving money on my own because I need to start dealing with retirement stuff?
Tracy: I think it’s super important that people not be intimidated. There’s this misconception that you need to have hundreds of thousands of dollars to get in the stock market. That is not true. First of all, anyone could open a savings account, period, end of story. You can and you should automatically have money transferred from checking to savings without you even knowing. When I was a kid, my mom used to have an envelope for Christmas and she would like stuff it with dollars when she had any leftover change. She stuffed it in an envelope so that she saved all year for Christmas and didn’t get smacked in the head. It’s really smart and kind of the same thing, except we can all do it electronically now. Let’s just say you’re living off alimony, maybe you’re looking for a job. Even if it’s $5, take up $5 and automatically have it transferred into a savings account. From there then you can do anything. One, you can keep it, but two, just to your point, if you truly want to get into this market and be a part of it, there are some great apps that allow you to just move $5, $10, $100, or whatever you have and get yourself in this market. Schwab does it and Robinhood does it. There’s a ton of them and you need to research them and figure out which one works for you because they’re all different. Some of them have better research than others, but take the time and figure it out. I think the cool part about this is even if you have $5 in a share of a company, you automatically start to take interest. This is how you slowly learn about what’s happening out there. You hear that some big amusement company is shutting down the parks because of whatever. All of a sudden your ‘spidey sense’ goes up and you say, hey, I own that stock. Is that going to affect me? You start to see the world differently around you. I always said that women in particular, and again, I’m going on historical norms here, should make a laundry room list. If you go into your own laundry room, and men do laundry too, I take that back, but if you go into your laundry room, look at the things that are there that you will forever need and use. Bleach, why don’t we own that company? The laundry detergent you put in your washing machine? Every time I would joke that all over the floor of my laundry room are all the sports equipment my kids use, why don’t I own all those companies? I feel like I pay the CEO salary some days with all this stuff, right? This gets you thinking about it, and it gets you involved in your future, your savings, and your retirement.
Jessica: So what are some of those apps specifically, so people listening are going to be like, oh my god, I’m totally going to look into that.
Tracy: Yeah. So Mint does it, and Betterment does it. I would say check out, go online and google fractional shares and start figuring out where you want to be and how you want to do it. Just practice. Put them on your phone, and just practice. You don’t even have to put money in. Just get a sense of whether it’s user friendly enough for you too. Another great way to get yourself in the market too is many of these sites, Wall Street Journal and Vineyard Times, you can create a mock portfolio for yourself. Just follow these stocks. So pick 10, lots of them have it, pick 10 stocks, and say hypothetically I’m investing $10,000 in these 10 stocks. See where they go. You get a real sense of how they move, the volatility in these things, and is it the right decision? It’s a great way to learn, and it’s all about educating yourself.
T.H.: That sounds great. The banks probably do something too where you can set up maybe an auto transfer, however many days, and which day of the week, so you automatically take it out. Back to your original thing about coffee, if you forego one Starbucks a week, there’s your $5 that you’re already saving so there have to be great ways to do this. But this has really really been great. I have learned a lot myself so thank you, Tracy.
Tracy: You’re so welcome. I think the take away though is once you’ve heard a lot of this stuff, make sure you ask questions. Don’t be blindsided. Ask, ask, ask. Is there a pension, is there a 401(k), what is there, and what’s my piece?
Jessica: So you mean ask questions in your relationship to make sure you have the landscape of what your finances are. Not necessarily ask your financial advisor, although you’ve said before, I want people to ask me because then I know they care and I know they’re following along.
Tracy: Ask everybody. Never never never not ask questions. Ask everyone. Ask when your marriage is still good. Make sure you understand. If your marriage is not good and you can’t ask those questions, make sure you ask your attorney to ask those questions. Your attorney knows to do this, god willing. But make sure there’s a little mental list in your head of what you should be asking for. You don’t need to go figure out the present value of the pension plan, let the number crunchers do that. But know that there is one and know there’s a piece that should be coming to you. It’s just all about awareness.
Jessica: Awesome. Awesome. Well, thank you again so much for all of the great information and for bringing it in to the ExExperts community.
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