Divorce is costly in many ways. It’s time consuming, emotionally draining and can end up costing you big bucks. While working with new clients who are recently divorced, I often have to clean up some of the financial mess that resulted from poor decisions that were made during the divorce process. Avoid these seven mistakes if you find yourself parting ways with your spouse.
Divorce is never easy. But these kinds of financial mistakes can make the process that much harder. Here are 7 financial mistakes to avoid while divorcing.
1) Retail therapy
Why not run out and buy a new car to represent your new-found freedom? New cars, new homes and new faces may impact your financial situation negatively. You may have easily been able to afford that luxury ride in the past. However, you may find that payment onerous now that all the bills fall onto you.
You can always put the money back once the divorce is final. Right? Maybe, maybe not. If you are selling highly appreciated assets, you may owe substantial taxes when you sell the various investments.
Additionally, since those assets will no longer be invested, they won’t be helping you stay on track for your various financial goals. Your goals may have changed during the divorce process but I’m sure you still have financial goals.
3) Forgetting the tax implications of spousal support
Back in the good ol’ days and before the Trump tax plan went into effect for 2018, the spouse paying alimony would get a tax deduction for paying spousal support. The receiving spouse would be the one who was stuck the taxes on that income. Under the Trump tax plan, the person paying alimony no longer gets that tax break.
That is for divorces finalized after December 31st, 2018. In most cases, the spouse paying alimony is in a higher tax bracket than the recipient. Higher taxes mean there is less money to go around. Not really a great thing for divorcing couples.
4) 401(k) distributions and ignoring the taxes
Money can be really tight during a divorce. With attorney bills, new home costs and that aforementioned new car payment, your 401(k) may seem like a big pot of money that will solve all of your short-term money woes. If you do not have taxes withheld, you can get hit with another whopping tax bill, and an additional IRS penalty of 10% if you are under the age of 59 ½.
P.S. If you are getting a qualified domestic relations order (QDRO), which is basically getting some portion of your former spouse’s retirement accounts, you can put it into an IRA account, in your own name, and continue to defer taxes. Taking it all as cash now could place you in a much higher tax bracket and cause you to owe more taxes. BAD IDEA.
5) Fighting for the house at all costs
I hear over and over, “She got the house. She is set.” While it may be a gorgeous estate and worth millions, it may also come with a huge mortgage and a high-cost to maintain. At the same time there have been recently divorced people stuck with a house that’s worth less than what they owe. (Negative equity).
Make sure you consider all of your options when deciding what to do with the marital home. If you’ve lived there for a number of years, it may be beneficial for one party to keep it. That’s especially true if it has a lower tax base.
On the other hand, if you can’t afford to keep it up, don’t end up in a Grey Gardens situation where you’re eating cat food, without proper plumbing just so you can remain living in what was once a grand estate.
6) Quitting your job to avoid alimony
This is one of those chopping off your nose to spite your face situations. While it may seem like a great idea, all it will mean is more time in court, and more money spent on attorney’s fees, in the long run.
At some point in time you will most assuredly go back to work. If not, you will most likely suffer more, financially, from not earning a paycheck than you would writing that horrid alimony check.
7) Not having a Financial Plan
You’re finally free and you don’t have to answer to anyone else. The last thing you want to think about is a financial plan. Big Mistake. Not having a new financial plan could be one of the biggest financial mistakes you could make after a divorce.
It’s easy to succumb to the temptation of irrational behavior during such a complex and emotional time. However, potential financial mistakes made during that time could have lasting effects on your finances.
Take a deep breath and sit down with a fiduciary financial planner who can help guide you through the maze of complex financial issues that arise during the divorce process.
With your divorce settlement finalized, the future is all yours. With a clean slate, hopefully you can enjoy your new-found freedom and be proactive by taking control of your financial life.