Divorce Finance: What You Don’t Know Can Be Costly
Divorce is a painful subject for all parties, and the complexities of a financial separation can be daunting. In this article, Certified Financial Planner™ and Certified Divorce Financial Analyst Kevin Worthley points out some of the lesser known implications of a divorce settlement. One of the partners read this article and commented, “I wish I had read this before my divorce!”
When a couple decides to divorce, much of the attention and emphasis of the process tends to be on the legal issues. The financials are addressed of course, but mostly on topics of spousal and child support and the division of marital assets. In most cases, the income, assets and how they will be divvied up are well-known to both spouses and attorneys. Unfortunately, what is often missing are the implications of the financial settlement for both spouses after the divorce is final. Not knowing the how’s, why’s and what if’s of the settlement you are agreeing to could have significant implications on your post-divorce life and meeting future financial goals.
Retirement accounts are a potent minefield for problems. Many ex-spouses have short-term cash needs and look at the acquired 401(k) account or IRA’s for withdrawals. Big mistake! Depending upon their tax-bracket, the penalties and taxes incurred by premature distributions from these accounts could be 30-45% of the withdrawal – a nasty tax surprise for an unforced financial error. Many people (even attorneys) do not realize that the IRS does allow a penalty-free premature withdrawal from a 401k in divorce, but there still would be income taxes to be paid regardless.
Another problem area is pension division. Some may not realize that many pensions (such as government pensions) do not allow lump-sum distributions. This could be important to the non-participant ex-spouse who realizes (post-divorce) that she may have to wait many years to use this particular asset in the divorce.
Social Security benefits are often little-understood as well. One little glitch that catches pre-retiree divorcees by surprise is a restriction on claiming spousal benefits. If a lower-benefit ex-spouse wishes to collect on the higher-earning spouse’s Social Security income benefit after the divorce, and that higher-benefit spouse doesn’t file or file-suspend, the lower-earning spouse must wait two years post-divorce before s/he can receive that higher benefit. Of course, they could collect their own, assuming they are eligible, but not knowing this ahead of time could have big implications on their income and lifestyle.
Finally, understanding cash in-flows and living expenses ahead of time could be critical to whether an ex-spouse will be able to sustain an anticipated lifestyle, maintain a house and even be able to support themselves and children of the marriage. All too often, divorcing people settle on a financial agreement without analyzing whether that agreement will work out well for them in the future, or they will need to start tapping savings and other financial assets (like retirement accounts!) just to make ends meet. Knowing all of this beforehand can save a lot of grief and regret.
The key to succeeding financially in divorce is having the assistance of a qualified and experienced financial profession on your divorce team, whether that person is a CPA or a Certified Divorce Financial Analyst. Your attorney will most likely be well-versed in the law and may have some financial knowledge as well, but may also be ill-equipped to offer specialized financial advice. Having such advice could mean a significant difference between financial success and potential disaster.
Kevin Worthley is a Certified Financial Planner™ practitioner, Certified Divorce Financial Analyst and principal advisor/owner of Equitable Divorce Solutions, LLC, offering divorce financial advice and counsel to divorcing spouses in RI and MA. Visit his website at www.equitable-divorce-solutions.com or e-mail him at kevin@equitable-divorce-solutions.com
Any views, opinions, and statements are those of Kevin Worthley exclusively and may not represent the views, opinions, and/or statement of Aaronson Lavoie Streitfeld Diaz & Co, PC or its officers or owners. Nor has Aaronson Lavoie Streitfeld Diaz & Co reviewed or authorized the information Kevin Worthley has presented and it expresses no warranty on them.
