Divorce Mortgage Planning is a holistic approach to evaluating mortgage options within the context of overall financial objectives related to divorce. A Certified Divorce Lending Professional (CDLP®) plays a crucial role in integrating the selected mortgage into long and short-term financial and investment goals, minimizing taxes, reducing interest expenses, and maximizing cash flow.
Understanding Divorce Mortgage Planning:
The Role of a CDLP® in Divorce Mortgage Planning: A CDLP® assists divorcing homeowners in making informed decisions regarding home equity solutions while identifying potential conflicts between the divorce settlement, home equity solutions, and real property issues.
Case Study: Traditional IRA vs. Marital Home Consider the following example:
- Sam retains the marital home valued at $500,000.
- Mary is awarded Sam's traditional IRA valued at $500,000.
While this may appear equitable on paper, it may not be fair. The marital home offers future appreciation potential, while the traditional IRA may result in future tax liabilities for Mary upon withdrawal.
IRA Considerations:
- A traditional IRA consists of pre-tax dollars and is taxed at the current rate upon withdrawal.
- A ROTH IRA offers tax-free growth and tax-free withdrawals in retirement.
- Depending on Sam and Mary's tax strategies, a ROTH IRA conversion might be advantageous, especially if their future tax rate will be higher.
Tax Implications:
- If Mary’s current tax rate is 25%, the cost to convert the traditional IRA to a ROTH IRA would be $125,000.
- If Mary’s future tax rate is 30%, her tax liability during retirement would be $150,000.
- If Sam agrees to help Mary cover the conversion cost, he needs to fund the $125,000 conversion cost.
Funding the Conversion Cost:
- Investment Account Withdrawal: Withdrawing $125,000 from an investment account earning a 6% annual return would cost Sam $7,500 annually in lost returns.
- Mortgage Utilization: Using a mortgage with a 4% interest rate over 30 years, the annual interest cost would be $5,000, creating an annual benefit of $2,500 compared to withdrawing from the investment account.
Consulting with Professionals: Divorcing clients considering a ROTH IRA conversion should consult with their attorney and financial advisor to determine the best tax planning strategies.
Why Involve a CDLP® Early in the Process: Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can set the stage for successful mortgage financing in the future. The CDLP® helps divorcing homeowners make informed decisions about their home equity solutions and identifies potential conflicts with the divorce settlement.
Disclaimer: This information is for informational purposes only and not intended as legal or tax advice. Contact an attorney or tax professional for legal and tax advice. Interest rates and fees are estimates and subject to market changes. This is not a commitment to lend. Rates change daily—call for current quotations. The information in this newsletter is prepared by an independent third party and distributed for consumer education purposes.
Copyright 2021—All Rights Divorce Lending Association
