If your marital estate is made up of $100,000 in cash and $100,000 in an IRA account, would it be equitable for one spouse to take the cash and the other to take the IRA.  Of course not! In order to reach equity when retirement assets are not being equally split, the assets must be tax effected.  But at what rate?

Generally, you should use the expected marginal tax rate at the time the retirement asset is actually withdrawn, not automatically the client's current tax rate.

For a traditional IRA or 401(k), I would generally use a reasonable estimate of the client's future marginal tax rate, based on the person's anticipated retirement income, filing status, deductions, Social Security, pension income, RMDs, and other taxable income.

For example:

	Current	Retirement
Traditional IRA	$500,000	$500,000
Assumed marginal tax rate	32%	22%
Tax effect	$160,000	$110,000
After-tax value	$340,000	$390,000

Under IRS rules and regulations distributions from traditional qualified retirement plans are generally taxable when distributed, whereas qualified Roth distributions generally are not.

Using the current tax rate can be misleading. Suppose a divorcing spouse is currently earning $400,000 and is in a 35% federal marginal bracket. If that person expects to retire with $100,000–$150,000 of taxable income as opposed to the current $400,000, applying the current 35% rate to the entire IRA may substantially overstate the future tax liability.

Conversely, using a very low retirement rate can understate the tax if the person will have a substantial pension, significant Social Security, large RMDs, other investment income, continued employment, or substantial retirement assets.

And because the parties will generally be filing separately after divorce, post-divorce filing status matters as well. Also keep in mind, depending on the party’s financial situation, the entire retirement will not be cashed in at one time, but will be drawn ratably over the expected remaining life of the party.

But there's an even bigger issue. I would be cautious about simply taking account balance × expected tax rate = after-tax value.

For equitable distribution, you're comparing different types of assets. A $500,000 traditional IRA and $500,000 of cash aren't economically identical because the IRA carries a future tax liability. But the tax isn't necessarily paid immediately, and the retirement account can continue growing before the tax is paid.

So a sophisticated analysis can consider when the account is expected to be withdrawn, expected withdrawals over time, expected future taxable income, federal and state tax rates, filing status after divorce, and RMD requirements.

Tax effecting should attempt to estimate the economic tax burden that the particular spouse will actually bear, rather than simply applying today's marginal tax rate.

And I would not necessarily use the same tax rate for both spouses. If one spouse is expected to have substantially higher retirement income than the other, their respective after-tax values may be different even if they receive identical pre-tax retirement assets.

Keep in mind that the easiest solution should tax effecting become an issue is to equally divide the retirement assets.  Then the tax burden is equally shared.