It might be the only thing the two sides in a divorce can easily agree on: it’s no fun.
On top of the emotional toll, financial missteps during the process can leave you in far worse shape than you intended. And the more intertwined you and your spouse’s finances are, the more closely you’ll need to pay attention while untangling them.
Ideally, you’ll have an attorney and a financial advisor who are advocating for you. Nevertheless, experts say that even if you’d rather spend as little time as possible thinking about the divorce, it’s worth making sure you understand the implications of all financial decisions being made.
“You are your own best advocate,” said certified financial planner Joyce Streithorst, director of financial planning at Frisch Financial Group in Melville, New York.
Your attorney also might be a bit busy right now. After summer winds down, divorce filings tend to multiply.
“Most people don’t file during the summer, partly because the kids are out of school, they’re vacationing and they’re not focused on their relationship,” said John Slowiaczek, president of the American Academy of Matrimonial Lawyers. “Then there’s a rise after Labor Day because people want to get things going before the holidays hit.”
If you are among those pursuing divorce, here are some financial mistakes to avoid.
1. Keeping a home you can no longer afford.
While staying put means one less change in the midst of an already life-altering event, it often makes little financial sense.
“Unfortunately, many keep their homes not realizing that upkeep costs are no longer sustainable,” said certified financial planner Stacy Francis, president and CEO of Francis Financial in New York. “There are now two households existing on the same income where previously there was only one.”
2. Taking the house in lieu of liquid assets.
If you are offered the house in exchange for your ex getting comparably valued investments — i.e., a retirement, bank or brokerage account worth the same amount — think twice before agreeing.
“On paper the two may be equal, but practically speaking the house is far more costly to maintain,” said CFP Barbara Shapiro, president of HMS Financial Group in Dedham, Massachusetts.
3. Not considering the tax implications.
Not all financial accounts are taxed the same way.
For instance, if you get the 401(k) plan account worth $100,000 and your ex gets the checking account worth the same, you just got the raw end of the deal. Taking cash from the checking account incurs no tax, while any withdrawals from the 401(k) would be taxed as regular income to you. “Most individuals forget to look at the complete cost of each asset, particularly the tax nature of each,” Francis said.
4. Not getting a court order to get your piece of the 401(k).
If your soon-to-be ex has a 401(k) plan, you must have what’s called a qualified domestic relations order, or QDRO, to access your share. (Individual retirement accounts do not require a QDRO). This court order, which must get final approval from your retirement plan, marks one of the few times you can take money from a 401(k) without paying a 10 percent early withdrawal penalty. You will, however, pay income tax on the amount if you don’t roll it over to an individual retirement account within 60 days.
5. No life insurance on your ex if you’re receiving support.
Depending on how heavily you rely on child support or alimony (aka spousal support), the death of your ex could leave you in a financial jam. Life insurance on the person, with you as the owner and beneficiary of the policy, can serve as protection against that potential loss of income. “Ask yourself if you have the capacity to meet your financial needs if those payments were to stop,” said Brett Anderson, a certified financial planner and president of St. Croix Advisors in Hudson, Wisconsin.