By Kristi De Rycke, Registered Assistant
Divorce is never a fun topic to discuss. If you are going through a divorce or know someone who is, you are not alone. According to worldpopulationreview.com the United States ties for third as the country with the highest divorce rate, so this topic needs to be discussed. Tied with Gibraltar and third behind only Russia and Belarus, divorce is an issue for many (and, yes, I had to Google where Belarus even is). How do you best protect yourself in a divorce? This information was pulled together for easy access for those of you going through the emotional turmoil that do not have the time or energy to search the net right now. Do you have a friend or family member that could use this information? Share it with them.
The most important part of starting this process is to try to remain calm and keep your emotions checked. I recognize that this seems like an unrealistic expectation during such an emotionally charged time. It is just that behavior resulting from high emotions may impact your outcomes after your divorce if finalized. The decisions and agreements that you are working through now, will affect you the rest of your life. Here is a quick list of things to think about and start addressing.
- Certain states consider property differently. If you live in a community property state, you will own half of everything that you acquired during your marriage including your paycheck regardless of the name on the property. Separate property means that anything with your name on it no matter when acquired is yours. There are only 9 community property states including Wisconsin, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Alaska is a bit of a mix and the rest are separate property states. In community property states, it is important to separate your residences as soon as possible. The date of separation will then be defined, and any future paychecks will not be considered as property of both. You can open your own bank account for future paychecks so that any money you put in that account cannot be accessed by your spouse. In a community property situation, this is true only after the date of separation has been established.
- If you are concerned about your spouse’s actions or just want to be on the safe side, make sure to call any joint credit cards and put a freeze on them. Open your own credit card in your name only. Use it wisely as you will be working on rebuilding your own credit score. You will still be mutually responsible for any credit card debt that was on the card prior to the divorce but it can help to prevent your spouse from running up high debt after the decision to divorce has been made.
- Change your account passwords on any accounts that are yours and yours alone.
- Many times, a house may be sold, and the proceeds split. However, if you agree that you get to keep the house in the divorce, make sure to refinance the mortgage into your name only. On the flip side, if your spouse keeps the house make certain they are refinancing so you are no longer responsible for that debt.
- Make certain to update your beneficiaries on any accounts that end up being yours after the divorce is final.
- Establish your new normal. Figure out what your current expenses total. Your financial situation is very different when you cover the rent or mortgage, heating, water, and sewer on one income. Also add in any child support or alimony owed or paid.
- What about health insurance? If you were on your spouse’s plan, start looking into other options before the divorce is finalized. You may have the option of staying on your spouse’s plan for up to 35 months through COBRA secondary to the divorce being a qualifying event. Check into options through your own employer or through private insurance.
- Make certain that you have insurance on your own vehicle and house. Be aware that the cost of insurance may be higher if you were in a bundle with residence and several vehicles prior to the divorce.
- Now let’s tackle the most complicated section…financial accounts. The first thing to do if you are worried that your spouse may drain any money on any accounts, is to call the financial institution that holds your accounts and freeze them until an agreement may be made. No matter what state you are in or whose name is on a retirement account, it may need to be split based on the overall divorce agreement. If you are the spouse that did not manage the finances, make sure you know where everything is, what the balances are and have access to those accounts. FINRA recommends seriously considering tax implications before taking money out of accounts. It may seem simpler to cash things out and each invest separately but this can come at a high cost. On taxable accounts, you would have to pay taxes on any capital gains. Also consider where the market is and how it has moved. Cashing it out during the divorce proceedings may mean realizing gains or losses. 401k or 403b plans can be split into separate accounts as well with a Qualified Domestic Relations Order (QDRO). The QDRO can define a certain dollar amount each spouse is entitled to or a percentage. FINRA points out that depending on the 401k plan, the non-owning spouse may be able to leave it in a separate account within the 401k plan, withdraw without penalty for a one-time distribution or move to an IRA. According to FINRA, you can take out a one-time divorce-related exemption with the QDRO without penalty, but you may have to pay taxes on it as ordinary income. Consult your tax professional. You do not need a QDRO for an IRA. Instead, IRA plans are divided based on the divorce decree or separation agreement. You then submit that documentation to the IRA company. You can roll money from an IRA into your own IRA while keeping the tax-deferred benefit and not paying penalties. Make certain this goes direct IRA to IRA and that you do not send a check to you before you open another account. The IRS sees this differently if you are in the middle. Kiplinger points out that it can be a big mistake to cash out money from your IRA and give your spouse ½ as you will be responsible for taxes on the entire distribution. This article also is clear that if you need money for the divorce proceedings that it is better to take a withdrawal from your 401k as you avoid the early withdrawal penalty due to divorce related exemptions. Keep in mind that saving and providing for you retirement is more important now as you will not have a second income or social security to rely on. Please proceed with caution and if you do not understand how consult a financial advisor and/or your tax professional.
There you have it the 9 tips to get started to get yourself back on your feet. This information is intended to get you started in the right direction. It is not in any way all inclusive. Each situation is different. Please use this information as a steppingstone to get started. Consult your tax professional and financial professional for further assistance on your individual situation and needs. If you find yourself so emotionally overwhelmed with this change in life, consider talking to a mental health professional to sort out your thoughts so that you can proceed with the tasks that need to be completed.
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By Greg Johnson
Divorce is never a fun situation to go through and as Kristi has pointed out there are lot of things that will need to be completed to separate you from your ex. A common thing I have seen occur in divorce situations is people not communicating the tax status of their investment accounts. For example, when the attorney’s start adding up assets, they do not take into account the after-tax value of a 401k. For instance, let’s say if you have $500,000 in your 401k and it is all pre-tax, you really don’t have $500,000 because you haven’t paid any income tax on that money yet. So, if you decide to keep your $500,000 401k and let your spouse keep the $500,000 house you are not equal in value. Make sure your attorney is taking the tax status of every account into account before agreeing to anything. Otherwise, please utilize the services of a qualified advisor to assist you with getting your affairs organized.
Material presented and hypothetical scenarios are meant for general illustration and/or informational purposes only and do not represent actual or future performance of any specific product or investment strategy. Neither Royal Alliance Associates, Inc., nor its representatives or employees, provide legal or tax advice. If legal or tax advice or other expert assistance is required, the service of a currently practicing professional should be sought.