Going through a divorce is emotionally and financially challenging. Whether you're considering a divorce, in the midst of negotiations, or adjusting to life afterward, a solid financial plan can help you move forward with confidence. This guide includes a financial checklist for divorce and advice about what actions to take right away versus long term.
Divorce is expensive. Legal costs can be as low as $500, but the average cost is $7000–$11,300.
Some people believe there is a strategic advantage to being the “first to file,” but this is rarely true. Having a clear plan of action and money set aside can give you an advantage during negotiations.
Even if you and your spouse are on good terms (relatively speaking), finances can be a major source of conflict. Even in happy relationships:
Source: Fidelity’s Love & Money report
If you’re thinking about a divorce or legal separation, here are the first steps to take:
Make a complete list of all your assets and debts, including:
You’ll need the documents above for legal proceedings and many will need to be updated when your divorce is finalized, so it’s worth having them close at hand.
Before you speak to your spouse about separating, it’s a good idea to consult with:
Close joint banking accounts and open new accounts in your own name. Including:
Remove your name from recurring bills you will no longer be responsible for:
Apply for individual:
Miscellaneous:
Update beneficiary information for:
Note: The list above is for illustrative purposes only. You may need to take additional actions based on your individual circumstances. Contact us for personalized recommendations.
If you have assets you want passed on to your children instead of your former spouse, be sure to update the beneficiaries on all your accounts, including savings, checking, certificates of deposit, investment and retirement accounts. Updating a trust or will is not enough.
That said, it IS important to update your trust or will. Any property listed in the trust must be retitled (homes, vehicles, boats, etc.). Even if you designate children or other relatives to receive assets when you pass away, if your ex-spouse is still on the deed, a court may override your wishes.
If your ex-spouse is currently the executor of your will or the trustee of your estate, you have a few options.
Learn more about the role and responsibilities of a trustee.
Retirement savings accounts and pensions are often divided as part of a divorce settlement. Divorce is considered a major life change so, once things have settled down, it’s a good idea to meet with a financial planner who can help you update your retirement savings strategy.
In the immediate term, there are tax pitfalls to avoid. Here’s what you need to know:
Assets can be transferred between spouses without an early withdrawal penalty if proper procedures are followed. Financial institutions need specific documentation to initiate the transfer.
To avoid penalties and income tax, assets must be transferred from one account to another. If you are under age 55 (401(k) plans) or 59 ½ (IRA accounts) and don’t follow the correct procedures, withdrawals will be taxed at your regular income tax rate in addition to a 10% fee.
Here are a few more tips:
IRA assets transferred into your account from an ex-spouse don’t count toward your contribution limit for the year. That said, if you are a high-income earner who contributes to a Roth using the backdoor method, you’ll need to open a new “clean” IRA to continue converting assets.
Pensions work differently than 401(k) and IRA accounts and rules vary from employer to employer. Generally speaking, the pension-holding spouse can either buy out the non-participant spouse or have a set amount distributed to their ex monthly or bi-monthly.
People married at least ten years can collect Social Security benefits based on the ex-spouse’s income. Some couples delay their divorce filing 6-12 months to reach the ten-year mark rather than lose this benefit.
As mentioned above, your retirement savings strategy may need to be updated after your divorce. Living expenses may increase and your tax status will change. A financial expert can help you make adjustments and plan for the future.
At Assembly Wealth, we take pride in helping clients navigate difficult times and guide them to a brighter future. If you’re considering a divorce or recently experienced a significant life change, we can help update your investments, answer questions and act as a sounding board.
Please contact us online or give us a call at (415) 541-7774. We’re here to help.
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