By Julia K. Pham, CFP®, AIF®, CDFA®, Wealth Advisor featured in Kiplinger
From overlooking hidden assets to scary tax surprises, help protect your financial future by steering clear of these common pitfalls during the divorce process.
Divorce is a significant life transition that can bring emotional, physical and financial challenges. Before going into a divorce, it’s important to be mindful of the most common financial pitfalls along the way. Being mindful of these mistakes can help you set the foundation for a more stable and successful post-divorce life.
As a CERTIFIED FINANCIAL PLANNER™ professional and Certified Divorce Financial Analyst® practitioner, I’ve witnessed many common financial mistakes that people make during divorce proceedings. Here are seven of the most frequent and impactful errors to avoid:
1. Overlooking hidden assets
In many marriages, one spouse handles most financial responsibilities, leaving the other unaware of certain accounts or assets. Failing to uncover all marital assets — such as hidden bank accounts, retirement plans or real estate — can lead to an unfair settlement. A divorce involving a business complicates matters further.
Ensure you have a comprehensive list of assets and gather key documents — bank statements, retirement and investment accounts, life insurance policies, property deeds and incorporation documents if a business is involved. If necessary, hire a forensic accountant to help locate anything that may have been overlooked.
2. Forgetting about taxes
Not all assets are created equal, especially when it comes to taxes. Withdrawing funds from retirement accounts like a 401(k), IRA or pension can lead to large tax bills and penalties, while selling a home may trigger capital gains taxes. Also, know how alimony and child support are taxed when negotiating an agreement.
Before finalizing the division of assets, consult a tax professional or financial adviser to understand the tax implications of your decisions. Remember, unless you finalize your divorce on the last day of the year, you will need to file taxes for the previous year with your spouse.
3. Not budgeting for your new status
Post-divorce financial planning is essential, especially if you’re transitioning from a dual-income household to a single income. Many people underestimate the costs of maintaining their lifestyle, including housing, utilities, health care and child support. Also, consider the unpaid labor you relied on from your spouse and how taking on those responsibilities — or outsourcing them — could affect your finances. Create a detailed budget for your new life and incorporate these expenses into your settlement negotiations.
4. Keeping the family home without considering the costs
While keeping the family home might feel like an emotional necessity, it can become a financial burden. Consider whether you can afford the mortgage, property taxes and maintenance costs on your own. If there’s a mortgage, one party may be able to assume it, keeping the same loan terms and interest rate. However, if the loan must be refinanced, you could face higher interest rates or payments. Often, selling the home and splitting the proceeds can provide a cleaner financial break and reduce future stress.
