A divorce can be draining—both emotionally and financially. It may feel like you'll never get to the other side. But you will. It will just take patience, planning, and a financial and legal team you can trust.
To get started, consider these divorce do's and don'ts.
9 divorce do's
- Plan. Think about how you will build your life after divorce. Having a financial planner or accountant work with your divorce lawyer or mediator may help you make decisions about a divorce settlement that could help you develop and protect your plans for a comfortable retirement. A financial professional may also be able to help you determine your post-divorce budget and investment strategy.
- Gather all records. Make a clear copy of all tax returns, loan applications, wills, trusts, financial statements, banking information, brokerage statements, loan documents, credit card statements, deeds to real estate, car registrations, insurance inventories, and insurance policies. Be sure to copy records that can trace and verify separately owned property, such as an inheritance or family gifts.
- Try to gather at least 5 years, because you'll need that for the financial disclosure part of the legal proceedings.
- Know what is owed. Hidden debt is a common surprise among divorcing couples. In the 9 states with community property laws—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—divorcing spouses are generally held responsible for half of their spouse's debt, even if the debt is in only one spouse's name. Even in non-community property states, divorcing spouses are often held jointly responsible for debt incurred through jointly issued credit cards or loans, even when one spouse did not benefit from such debt.
- Obtain a full credit report to make sure there are no surprises on it. Annualcreditreport.com provides free credit reports every 12 months from each of the 3 credit bureaus.
- You'll want to close joint credit accounts and shift to single accounts so that an ex-spouse's credit score won't affect your credit rating.
- Document household goods. Take photos of valuables around the house—jewelry, art, and perhaps sentimental items that are valuable in other ways. It's not unheard of for divorcing spouses to hide assets from one another.
- Get your fair share. Half of everything may be yours—if you acquired it during your marriage—whether you want it or not. Even if you never liked a painting, for instance, you may be able to use it to trade for something you do want. If you helped put your spouse through graduate school, law school, or medical school, you may be entitled to some reimbursement for the cost of tuition.
- Keep close tabs on legal and advisor fees. Keep close track of the work they are doing on your behalf. Remember that your lawyer is a paid professional who is billing you at an hourly rate. Be mindful of the time your lawyer spends with and for you.
- Check Social Security benefits. Once you reach age 62 or your full retirement age, your ex's earnings history may provide a larger Social Security benefit than the one you are entitled to on your own earnings history. So, it can pay to check whether using your spouse's earning history is a better option for your Social Security benefits.
- Consider how you'll need to change the registrations on any financial accounts that are owned jointly. Such ownership changes typically require specific documentation. Consider speaking with a tax advisor or other financial professional before making any big moves.
- Review your will and estate plan, including beneficiaries named on insurance policies and retirement accounts.
5 divorce don'ts
- Don't necessarily hold onto the house. Your house may have sentimental value, but keeping it doesn't always make financial sense, especially if it's a stretch to pay for the upkeep, mortgage, and property taxes. A home is likely to have ongoing and unexpected expenses, and its future value isn't assured.
- Don't ignore potential tax consequences. Many decisions in a divorce may lead to a higher tax bill. You may need to consult an accountant or tax advisor to determine what makes sense for your situation.
- Don't forget about health insurance. If you've been covered by your spouse's policy, you may need to make other arrangements. Investigate all of your potential options, including using the Consolidated Omnibus Budget Reconciliation Act (COBRA) provisions of your health insurance to continue your current coverage for a period of time. You may also want to shop your state's health insurance exchange under the Affordable Care Act for a new policy.
- Don't attempt to split retirement accounts such as 401(k)s or IRAs without the correct documentation and court orders. It could result in a taxable distribution from the account.
- Don't roll over all of an ex's retirement account into an IRA if you need some of the money for divorce expenses. If your divorce settlement allocates assets under a qualified domestic relations order (QDRO), under current law any withdrawal a QDRO alternate payee takes from a 401(k) or 403(b) is exempt from the 10% tax—even if you're under age 591/2.* If you think you'll need money for unavoidable divorce expenses, and you cannot pay them with any other money, you may want to make a withdrawal before you do a rollover. Of course, you will owe income tax on what you withdraw.
- Otherwise, if you are under the age of 59½ and roll the money into an IRA and then need access for divorce costs, you'll be subject to income tax on the withdrawal amount, and on top of that, the standard 10% early withdrawal penalty.
- Separate from any money you'll need to cover divorce expenses, do consider rolling the money into an IRA as soon as possible, as that is advantageous for your retirement. It gives this money a chance to grow.