Divorce: 3 of The Biggest Financial Mistakes You Can Make
The list of potential financial mistakes made while divorcing can be extensive. It is an exhausting, emotional time for everyone and since every money decision is emotional to begin with, this stress just adds to the mix. Dividing assets can get complex, which is why the finance industry CDFA © designation exists. Long ago, lawyers used to divide assets on a spreadsheet. But as finances grow in complexity, it becomes dangerous to do so. It is important to talk with your accountant, and to have a CDFA do the work for you.
Here are 3 of the most common traps people fall into:
- Fighting to Keep the Home
Home is a heartwarming word. Home is where memories are made, and where we feel safe and secure. It is natural to want to stay. The first question you need to ask is whether you can even afford to stay in the home. If you refinance under your name only, you will own all the debt. Is your credit score strong enough to qualify for a mortgage by yourself? What will the monthly payment be? What are all the other household expenses you will have like property taxes, utilities, repairs, condo fees, etc. It will all be on you now. Even if you are receiving alimony, it may not be enough.
If the home needs to be sold, it is often better to consider doing it while you are still together. Then each of you can qualify for capital gains of $250,000, reducing taxes owed on the difference between purchase and sale price.
- Dividing Assets Simply Based on Equal Value
A $500,000 house is not equal to a $500,000 IRA. For example:
* The costs of maintaining a home are much greater than maintaining an IRA.
* An IRA when distributed will be taxed as income, whereas a home will be taxed at a capital gains rate which often may be less.
* Homes typically grow in value at a lower rate than an IRA invested in the market.
When you divide your assets, its important to consider your current and future income brackets, taxes on the assets, ongoing costs, and lifestyle needs.
- Not Renaming Assets before the Divorce is Final
If you are receiving assets such as a home, investments, retirement funds, a pension – it is super important to ensure your name is on these items before your divorce is final. For pensions, it is very important to ensure a QDRO (Qualified Domestic Relations Order) is accurate and filed or your rights to a portion of your spouse’s pension may not be in place. This could mean a significant loss of income in later years.
If you are splitting debt, make sure your name is off the debt going to your spouse, otherwise you could be held accountable to pay it. It will also affect your credit score if your name is on the debt and your spouse does not pay it off responsibly.
A friend left her name on a line of credit with her ex-husband. He purchased a $25,000 engagement ring for his fiancé using that line of credit. If he were hit by a bus tomorrow, my friend would be paying for the ring. How uncomfortable is that!!??
Your Personal Money Coach & CDFA©
Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Behavioral Cents, LLC and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.
Carrie Rattle is a Master Money Coach, Certified Divorce Financial Analyst & Founder of Behavioral Cents. She is a 30-year veteran executive of financial services. Behavioral Cents helps women achieve independence, freedom, and a bigger voice in the world. By building a fatter bank account, women can confidently walk away from a bad job, build a business to change the world, or live their own dreams. Behavioral Cents delivers a private, non-judgmental atmosphere with a program tailored to change your money behaviors for the better – without deprivation. Thoughts always welcome: firstname.lastname@example.org.