7 Financial Mistakes to Avoid After a Divorce
Raise your hand if you’ve heard that half of all marriages will end in divorce?
Even if that statistic was once true, it’s not anymore. Divorce is on the decline and has been since the 1980s in America.
Experts now put your chances of uncoupling at about 39% in the U.S.
The drop in divorce rate seems to be, in large part, due to Millennials making their vows stick. A 2016 study found that young people were 18% less likely to get divorced.
And similar data is echoed across the pond, young Brits are 27% more likely to make it through their first decade together — the prime divorcing years — versus those who got hitched in the ’80s.
But divorce still happens and it can be one of the most emotionally and financially devastating events you have to go through. If you or someone you know is currently going through a tough divorce, here are seven mistakes to avoid that will impact your finances.
1) Retail Therapy
It’s tempting to start throwing money at the new problems you have. But buying a new car or a new house, or taking an expensive vacation won’t help your situation much, in most cases it’s going to make it worse.
Avoid the cliche of retail therapy and try to avoid making any big decisions that will affect your finances. The retail therapy high is short-lived, and what you’ll find is you’re left with bills and payments you can no longer afford when it’s all said and done.
2) Cashing in Investments
Legal bills are no joke, and you might be tempted to cover some of your fees by cashing in your investments. I’d advise against that. When you are selling highly appreciated assets, you typically owe substantial taxes. Additionally, since those assets will no longer be invested, you’re likely pulling yourself off track to meet your larger financial goals.
This can get worse if you’re retired. Ensure that you’ll have enough income to live off if you do decide to pull money out. The last thing you want is to have to go back to work years after being in retirement.
3) Forgetting the New Divorce Tax
Back in the day before Trump’s new tax plan went into effect for 2018, a spouse paying alimony would get a tax deduction for paying spousal support. The receiving spouse would be the one having to pay taxes on that income.
Under Trump’s new tax plan, the person paying alimony no longer gets that tax break. That is for divorces finalized after December 31st, 2018. And the spouse paying alimony is typically in a higher tax bracket anyway than the recipient. This means less money to go around and not great for divorcing couples altogether.
4) Pulling Money out of Your 401(k)
As I said, money can be tight during a divorce. Between attorney bills and that aforementioned new car payment, your 401(k) might look like a pile of cash that could solve all your short-term money problems.
But if you don’t have taxes withheld, you can face another huge tax bill, and the IRS will slap a 10% penalty on you if you’re under the age of 59 ½.
If your divorce settlement includes a qualified domestic relations order, which basically means you get some portion of your former spouse’s retirement accounts, you can put this into an IRA account under your own name, and continue to defer taxes.
What you should avoid doing is taking all the cash now, this could bump you into a much higher tax bracket and you’ll lose a large chunk of those funds.
5) Fighting Over Who Gets the House
If you anticipate any tension over who will get the house, consider this first: while your house might be gorgeous and worth a lot of money, it can also come with high costs to maintain and a mortgage to pay.
It’s not uncommon for recently divorced couples to leave one person with a house that’s worth less than what they owe (negative equity). Consider all your options before you decide who gets the house.
For instance, if you’ve lived there for a number of years, it might be beneficial to one party to keep it. But if either of you alone can’t afford the up-keep or mortgage payments, then it doesn’t really matter who gets the estate.
6) Quitting Your Job to Avoid Paying Alimony
I’ve heard of angry couples where the main breadwinner in the relationship literally quits their day job so they don’t have to pay alimony. I’ll tell you right now, it’s not a smart financial move.
This will end up costing you more time in court, more attorney fees and you’re delaying the inevitable, which is you’ll eventually go back to work and have to pay alimony. If you don’t end up working again, you risk losing steady income that likely will outweigh the alimony check.
7) Not Having a Plan
When all is said and done, you might feel like you’re finally free to do whatever you want with your money. And this is of course true. However, one of the biggest mistakes you can make is not having a financial plan after the divorce.
It’s tempting to start spending money on things that might bring you joy, especially if you’ve been in an unhappy marriage for awhile now. But the financial mistakes you make right after a divorce can haunt you for the rest of your life.
So take a pause and sit down with someone to get help to plan out your next steps. With everything settled, you should feel like you have total control over your financial life and hopefully can start fresh.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap