Ground rules, tax tips, and more to help you keep emotions in check and manage your finances wisely through the difficult process of a divorce and life afterward.
Anyone who’s been through one knows that there is nothing simple or dispassionate about divorce, even in the most amicable of splits.
The process is pricey, and the longer the marriage, the deeper the divide of assets. The complexities of divorce late in life have historically left one spouse in a financial situation that is either too complex to manage alone or borders on poverty.
Besides the cars, TVs, and furniture, there are the financial assets and debt, health care and insurance, and whatever cash might be left over. Then there are the tax implications of early withdrawals and divisions, the after-divorce maintenance issues—homes are money pits—and the life-as-one conundrum.
“Divorce wreaks havoc on everybody,” says Pat Mullaly, education coach, TD Ameritrade. “It’s amazing what people do to each other during divorce.”
That’s the high cost of emotions. Like drinking and driving, no one makes good decisions when they’re under the influence—and in this case, you might be so desperate or angry that you will do anything to either get out of the marriage or ruin the individual on the other side. But that’s no way to break up a decades-long chunk of your life.
“Outside of the emotions and the falling out of love, divorce is mostly financial decisions,” Mullaly says. “And once that’s all said and done, next are the decisions of how to maintain what is left and what financial choices to make going forward.”
The ground rules are simple enough:
Dividing net-worth possessions—where one spouse gets the house, and the other gets the monetary equivalent of assets between savings accounts, brokerage accounts, retirement accounts, and the like—is not always what it appears.
The overall raw numbers may work out on paper, but the real costs of liquid vs. illiquid assets are what matters. The expenses of owning a home—including the mortgage, insurance and property taxes, utility bills, and maintenance—could leave homeowners in far worse financial positions. A home is a paper asset with slow-growing appreciation that could be considerably tougher than stocks to liquidate should cash flow become an issue, particularly after child support and alimony run out.
Family portfolios that include alternate assets such as hedge funds and private equity could look liquid but may actually be contractually tied up.
When all the messy dividing is done, the IRS is waiting for its take. The culprit is appreciation—and the capital gains—in any assets such as stocks, real estate, and mutual fund accounts.
Budget, budget, budget. Subtracting an income from the financial mix is a prescription for disaster if you haven’t painstakingly considered expenses versus income and liquid assets.
That includes the here and after, meaning what lifestyle costs will run immediately and into the future as well as retirement. Retirement accounts are tricky and raise any number of tax-related issues when it comes to early distributions. Depending on the type of account, you can transfer funds through a Qualified Domestic Relations Order, but you’ll still face income taxes.
If you’ve been married nine years and 11 months, you’ll want to stick it out that extra month to collect Social Security benefits on your ex’s record.
The longer you draw out the divorce, the more it will cost in attorney fees. That’s as certain as death and taxes. And remember this: divorce attorneys are not, generally, certified financial planners or therapists, and they can be very expensive emissaries.
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.