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Whether it’s a friendly parting or a contentious battle, divorce is never easy. And the emotion of the event often keeps people from thinking through all the financial implications. As a result, people often make serious financial mistakes that affect them for years to come. That’s why we asked a financial planner to outline some of the top financial mistakes he sees when helping clients through a divorce:
Many people just don’t think about the implications of shared credit. If you took out any joint loans or credit cards during your marriage, you’re just as responsible for paying them off as your spouse. Lenders won’t forgive your responsibility after a divorce, even if your divorce agreement says that your ex-spouse will pay everything off. If they don’t, lenders could still come after you for payment and your credit score could take a hit. A safer strategy to consider might be to pay off all shared debts before finalizing your divorce so that you both head off with a clean slate.
After years of living in your family home, it’s easy to feel a strong emotional bond that makes people not want to move out. But you need to think hard about whether it makes financial sense to keep the house. Will you be paying the mortgage and the bills by yourself going forward>. If you take the house, will your former spouse get more of the other assets you two accumulated during the marriage? It may make to more sense to sell and downsize to a more affordable property.
If you’re going to receive alimony and/or child support after your divorce, you should consider protecting that future income. If your ex-spouse dies, that income would disappear. A life insurance policy on your ex-spouse could replace this money if they died. It is possible to set up your divorce agreement so that some of the alimony or child support goes towards paying for this coverage.
Coming up with a fair split of your property isn’t always easy. What if you own assets that can go up and down in value like stocks? Should you consider these assets to be more valuable than your cash? Less valuable? The same? The answer isn’t obvious, especially if you aren’t comfortable with investing. It’s better to leave this calculation up to a professional like an accountant or financial planner. This way you won’t have to worry about miscalculating and leaving yourself with an unfair share.
This one is tricky, and something many people struggle with during the divorce. You need to be careful with your retirement accounts because they carry more tax rules than other assets. First of all, generally you don’t want to liquidate your accounts to divide them as cash. Your financial planner would explain that you would owe income tax right away on all the money plus may have to a pay an extra 10 percent penalty if you are younger than 59 1/2.
Another option to consider is to have the arbitrator handling your divorce agreement include a Qualified Domestic Relations Order (QDRO) for your shared retirement plans. This document lets you move money out of your spouse’s retirement plan into your own IRA or 401(k) to satisfy your divorce agreement, and you wouldn’t owe any taxes when transferred.
Filing for divorce may seem like the end, but preparing to separate financially from your spouse is really the beginning of your life after the marriage ends. It is tedious, but you need to avoid making financial mistakes that will set you back. These tips are designed to help you avoid some of the biggest financial mistakes people make when getting divorced. For more information on financial topics, visit our learning center.
This article is a high-level summary of financial considerations during divorce, is for information and educational purposes only; does not necessarily represent the opinion of Protective Life; and, is not intended to serve as financial planning for preparing for divorce but, instead, to supplement other information specific to your situation. Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your legal or tax adviser regarding your individual situations before making tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.