Dr. Hetsler discusses with Mr. Noah Rosenfarb, a CPA and CDFA, opportunities to save money and taxes when doing Roth IRA conversions in the year of divorce. If you have a Roth IRA, this is something you must watch as it can shape the way you might want to structure your settlement agreement in the divorce.

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Divorce can be a complex and emotionally charged process, especially when it comes to dividing assets and financial accounts. One important aspect of divorce that many people may overlook is the treatment of Roth IRAs and Roth conversions. To shed some light on this topic, we spoke with Noah B. Rosenfarb, CPA, a certified public accountant who specializes in divorce financial planning.

Roth IRAs are a popular retirement savings vehicle that offer tax-free growth and withdrawals in retirement. When a couple goes through a divorce, they must decide how to divide their assets, including any Roth IRAs they may have. According to Rosenfarb, “The treatment of Roth IRAs in a divorce is similar to that of traditional IRAs. They are considered marital property and are subject to division between the parties.”

One important consideration in a divorce involving Roth IRAs is the treatment of Roth conversions. A Roth conversion is when you transfer funds from a traditional IRA or 401(k) into a Roth IRA, paying taxes on the conversion amount. Rosenfarb explains, “Roth conversions can complicate matters in a divorce because the tax consequences of a conversion are irreversible. If one spouse completed a Roth conversion during the marriage, the other spouse may be entitled to a portion of the converted funds in the divorce settlement.”

When it comes to dividing Roth conversions in a divorce, Rosenfarb recommends working with a financial planner or CPA who can help determine the fair and equitable allocation of assets. “Roth conversions can add complexity to the division of assets in a divorce, so it’s important to seek expert advice to ensure a fair and equitable settlement,” he says.

In some cases, couples may choose to reverse a Roth conversion as part of their divorce settlement. This process, known as recharacterization, allows you to undo a Roth conversion and move the funds back into a traditional IRA if desired. However, Rosenfarb warns, “Recharacterizing a Roth conversion can have tax implications, so it’s important to consult with a tax professional before proceeding.”

Overall, navigating the treatment of Roth IRAs and conversions in a divorce can be a challenging process. It’s important to seek the guidance of a financial professional who can help you understand the tax implications and make informed decisions about dividing your assets. As Rosenfarb advises, “Divorce is already a difficult process, but with the right guidance, you can navigate the complexities of dividing retirement accounts like Roth IRAs and conversions smoothly and fairly.”