October 22, 2017

Monthly Misconception for October – “$1 in a Savings Account Equals $1 in a 401(k)”

$1 in a Savings Account Equals $1 in a 401(k)

Yes and no. 

Yes, if you and your soon to be former spouse, simply wanting to equalize the market value of  the assets as part of your divorce, put the $1 savings account balance in “your” column and the 401(k) with a $1 balance in “his or her” column.

But no too.  And it is the “no” that you need to keep in mind as you negotiate your divorce property settlement.  Here’s why.

Current market value doesn’t necessarily reflect what you can do with the $1 asset, for example is the $1 liquid or not.  $1 in a savings account can be withdrawn and used immediately to buy $1 worth of goods or services.  On the other hand, your ability to withdraw $1 from a 401(k) account may be limited or even prohibited.  Or while $1 of equity in your home may be a real asset,  you probably don’t have access to the $1 of equity unless you sell or at least mortgage the home.

Current market value also doesn’t necessarily reflect the cost of making the $1 liquid.  For example, the savings account $1 can typically be withdrawn without incurring any taxes, penalties or withdrawal or other transaction fees.  But selling $1 stock in an investment account may very well net you less than $1 after you pay income taxes or commissions.  And an early withdrawal from an IRA will almost certainly result in an income tax obligation plus an early withdrawal penalty so the net will be less, and maybe significantly less, than $1.  Going back to $1 of house equity, imagine the sales costs such as real estate commissions you’d have to pay before any money actually gets into your hands.

But $1 of one type of asset, such as a savings account, isn’t necessarily always “better” than $1 of another type of asset, say a 401(k).  Just as important is identifying your own individual goals and objectives and creating a property division that furthers these.  For example, keeping the house while your spouse keeps a 401(k), while “equal” in terms of current market value, may not be a smart deal if you can’t afford to live in the house and find yourself having to sell it a year or two after the divorce.

The point of this blog then is to:

  • Make you aware that there are differences, such as liquidity, taxes and transaction costs, among assets. 
  • Encourage you to identify your short and long term financial goals and objectives.
  • Emphasize the importance of working closely with your divorce lawyer and/or financial advisor to negotiate and create a property settlement that is consistent with and advances these goals and objectives.  

Feel free to contact me to explore how the points in this blog apply to you individually.  I can be reached at lcappalli@cappallihill.com or 203-271-3888.



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