I’m in the middle of a divorce.
As a married couple, we did well financially, but I’m concerned about managing my finances on my own. How can I be sure I’m getting an equitable settlement? How can I make it last as long as possible? What about my retirement?
How Do I Handle My Finances After a Divorce?
Divorce is never easy, and the financial aspects of a split can be particularly challenging. Planning ahead and knowing what to expect can help you get through these difficult times.
Dividing assets in a divorce can be a difficult process, both financially and emotionally. Understanding your options is the first step toward a positive resolution.
First, determine what the court will dictate. Many people think they live in a community property state when in fact, they do not. California is a community property state; Massachusetts and Florida are not. Community property laws require that assets acquired during the marriage be divided equally; non-community property states require that property be divided ‘equitably.’ This may seem like a matter of semantics, but there is definitely a difference between ‘equal’ and ‘fair.’
If you live in an ‘equitable division of property’ state, i.e., one of the 41 states that is not a community property state, you will need to negotiate the division of property in your divorce. In order to do this, you first need to know what property you and your spouse have. If your spouse initiated the divorce and there is some animosity involved, consider the possibility that your ex may have assets they are not disclosing. If you cannot agree on a division of the property in your marriage, the court will decide.
For most couples, the house is the largest asset they have, so deciding its disposition is one of the larger issues in a divorce. Some couples will agree that one of them will buy out the other’s share of the house and remain in it; others agree to sell the house and split the proceeds. If you agree to forgo other assets in order to keep the house, make sure the assets you are giving up are fairly valued. Your share of the marital assets may include investments. If so, you should consider carefully what you want to do with them. Investments that met your goals as a couple may not be suitable for you alone. On the other hand, consider the consequences of selling them. You will want to look at your investment portfolio as a whole in order to determine the best way to align it with your needs and goals.
Alimony or Child Support?
Alimony is support that is paid to a previously dependent spouse. Child support is meant to be used to pay for the needs of children who live with the other, custodial, parent.
Your divorce decree will indicate whether you will pay or receive alimony or child support, or both. There are a few things to keep in mind.
Child support typically ends when a child turns 18. In some states, the court can order support to continue past age 18 if the child is in college or disabled.
Alimony typically ends if the spouse receiving it remarries or cohabitates with a new partner.
Alimony and child support can be modified if the spouse paying it experiences a reduction in income. Be particularly mindful of this if your ex-spouse is self-employed, as they may deliberately reduce their income in order to try to reduce the amount of support.
Alimony and child support are taxed differently. Alimony is tax-deductible for the spouse who is paying it, and is taxable income for the spouse who is receiving it. Child support is not tax-deductible or taxed.
Setting Up a Post-Divorce Budget
Divorce is expensive, and a reduction in your standard of living should be expected. After all, the income that sustained your combined household is now expected to sustain two households. With careful planning, you can create a budget that will provide comfort and peace of mind as you begin a new chapter in your life.
Start with a spending plan that shows you where your money goes. If you need to, you can prioritize your spending so you’re not overextended. Next, develop a savings and investment plan that allows for emergencies and addresses your goals and future plans. Review your plan regularly to stay on track.
If your divorce settlement includes child support or alimony for a specific period of time, make sure you have a plan for what will happen when that ends. Be aware that alimony is taxable to the recipient and a tax deduction to the person paying it. Child support is the opposite: the custodial parent pays no taxes and the parent paying it cannot deduct it. Consider this when you are negotiating your settlement. If your settlement is sufficient so that you don’t have to work, you will need to consider how you will provide the benefits that your ex-spouse’s job provided, such as health care. You will be eligible to continue your health care coverage under your spouse’s employer’s plan under COBRA (the Consolidated Omnibus Budget Reform Act) for 36 months. However, it’s typically quite expensive to do this, since you will be paying the full premium for your coverage. Look into other, less expensive options available under the Affordable Care Act.
Be sure to change your will and your beneficiary designations after the divorce is final. Change your power of attorney and health care proxy documents as well. If you and your spouse had a trust, consider setting up your own trust once the divorce is final. Don’t make these changes prior to the finalization of the divorce or it could be construed as an attempt to restrict your ex’s access to assets.
Dividing Retirement Assets
Spouses who have stayed home are often concerned about funding their retirement after a divorce. As a non-working spouse, you are entitled to half of your ex-spouse’s retirement account. It’s considered a marital asset, just like your house and your joint savings account.
Your spouse’s retirement account may be either a defined contribution plan or a defined benefit plan. A defined contribution plan is the most common, and it includes plans like IRAs and 401ks. With a defined contribution plan, the employee makes contributions into the plan, and the employer may or may not match those contributions. The employee should get a regular statement indicating the amount that is in the defined contribution plan, which makes it easy to determine the value of the account.
A defined benefit plan is a retirement plan that is funded by the employer. It typically provides a pension upon retirement. This type of plan is a little trickier to divide in a divorce, and you may need to retain an actuary to determine its value.
Whether your spouse has a defined benefit plan or a defined contribution plan, you will need to have a Qualified Domestic Relations Order (QDRO) in order to divide the assets. Once you determine the value of the retirement account, the QDRO will provide for it to be divided equally.
You will now need to set up a qualified retirement account, such as an IRA, to receive the funds from your ex-spouse’s retirement account. The funds need to be transferred from your ex-spouse’s account directly to your IRA, and your IRA needs to be properly titled, in order for the tax advantages of a qualified account to be retained.
You may also be entitled to collect half of your ex-spouse’s Social Security benefit once both of you reach retirement age. In order to qualify, you have to have been married for at least ten years, have been divorced at least two years and you cannot have remarried before age 60. Both you and your ex-spouse must be eligible to collect Social Security. Even if you qualify for benefits on your own, you can collect half of your ex’s benefit instead if that’s a larger amount.
Returning to work
Many women elect to stay home if their husbands’ salaries are enough to support the family. If you find yourself in need of a job after an extended absence, it’s best to explain that absence to prospective employers. You may want to adapt your resume to a skills-based format rather than using a chronological structure, to de-emphasize your time off. If you took classes or volunteered, describe your experiences and skill building in business terms—don’t get emotional or nostalgic.
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