Divorce involves many decisions that can have far-reaching consequences. While the priority is the well-being of the children, financial experts see critical fiscal errors often during or after a divorce. The frustrating part is that these missteps can often be avoided if the clients are aware.
Common mistakes
These can make the process more expensive or cause problems after the fact:
- Shopping: It is exciting to have a fresh start but resist the urge to buy high-ticket items like expensive cars or fancy apartments. Even if this was part of the marital lifestyle, the new reality is that two homes on the same income will involve a budget shift.
- Cashing in investments: It may be possible to pay the money back into a retirement account or investment but withdrawing the equity can mean higher tax obligations or penalties for early withdrawal. Taking money out of retirement plans also obviously means less money when it is time to retire. (See our post on QRDO).
- Tax law has changed: Paying spousal support is no longer tax deductible, which likely means a tax increase for the spouse paying support.
- Insisting on keeping the house: Houses are excellent investments only when the mortgage is a reasonable one, or it is paid off. Large homes also can cost a lot to maintain and come with a large tax bill.
- Quitting a job to reduce alimony: Quitting a job or intentionally getting fired will not reduce the amount of support owed; however, those laid off through no fault of their own will often be given some leeway while they search for a new job with a similar income.
- Not revamping a financial plan: Newly divorced individuals will need to reevaluate their retirement plans and other financial goals.
Divorce attorneys are part of this process
An attorney will spend time discussing the client’s financial situation as settlements are considered and assets are divided. Clients are also advised to continue to make smart fiscal choices as they move forward to ensure that there are no problems or surprises in the years to come.