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If You’re Getting a Divorce, Prepare for These 4 Financial Challenges

The financial challenges of divorce can add an extra layer of stress on top of an already emotionally charged situation. You’ll need to make decisions with your money that not only affect you now but will affect you in the future. As you navigate the process, you’re likely to run into obstacles and new challenges. Here are some of the biggest financial challenges of divorce, and a few tips to help your new chapter start on the right financial foot.

Dividing Your Property

You accumulate a significant number of assets during a marriage. The question is, how should everything be divided? Usually, the division of property is determined in a court of law or from an agreement between the two parties.

However, there are several states that are considered community property states, including:1

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

This means that marital assets and the debts that are incurred by either spouse during the marriage are split 50-50.1 Non-community property states divide the assets fairly at the discretion of the judge.

Tax Implications

There are tax issues that can arise from a divorce, which is why it’s so important to speak to an experienced financial professional when navigating tax status changes.

Some tax-related concerns that can arise include:

  • Who will get the tax exemption for dependents?
  • Who will claim Head of Household status?
  • Which attorney fees are tax-deductible?
  • Will “maintenance” payments be tax-deductible?
  • Is child support deductible?

Who Will Pay Your Debts?

It’s important to understand how much you owe and to whom you owe it. Obtain or make a report that includes all debt owed, how much, and whose name the debt is in. Make yourself aware of any debt accrued after separation has taken place, as you could be responsible for debt your partner took on during the divorce process. With the assistance of your team of professionals, you will need to determine who is responsible for what debt and how much.

Retirement Planning

If you or your spouse have retirement savings accounts, like an IRA or 401(k), the accounts may be divided between the two of you. If done properly, neither party will be required to pay the usual penalty tax. This can be a complicated process, so you may want to consider working with a financial advisor who can help you navigate and complete the transfer.

If you are losing some of your retirement savings, working with a financial advisor can help you determine the best strategy to make up for the loss of funds and stay on track.

How to Be Financially Proactive During Divorce

With a divorce in process, there are a few things you can do now to help you and your family adjust to the new financial circumstances.

Monitor your Expenses Closely

While you want to do this regularly, it’s more important than ever to keep track of how much you’re spending. If you are used to being in a two-income household, suddenly cutting that in half can be difficult. Make sure you are budgeting appropriately so that you can best provide for yourself and your children, if applicable.

Check with your Human Resources Department at Work

Find out how your employee benefits and insurance will be affected while going through a divorce. If you have insurance policies or retirement accounts through work, be sure to update your beneficiary information immediately.

Establish Your Own Checking Account

While you’ll want to work with your attorney before withdrawing from or closing any existing joint accounts, you can still begin establishing your own checking and savings accounts in the meantime.

Experiencing a divorce isn’t easy, but making sure you are financially ready to start your new chapter can make things a little less stressful. Speak with a trusted financial professional to figure out how to best get your finances in order so that you can start fresh and look forward to a strong financial future.

Read More:

4 Tips for Women Preparing for Single Retirement

Your Ultimate Guide To Finding A Financial Advisor

The Sandwich Generation: How to Financially Care For You, Your Kids, & Your Parents

When Should I Open A Checking Account for my Child?

References:

  1. https://www.irs.gov/pub/irs-pdf/p555.pdf

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.