After reaching the decision to end a marriage, divorcing couples must do their best to set hard feelings aside and rationally deal with the division of household assets. But, turning attention toward your finances while processing the complicated emotions surrounding the end of a long-time partnership is often times no easy task. Financial advice during your divorce is an important step towards you best outcomes.
The impact of a divorce on your finances is something that you should prepare for as you move from a double to a single-income household. Divorce often brings with it a change to both your income and expenses. TruNorth Divorce Solutions has put together a quick list of financial tips to set you up for post-divorce financial success.
1. Full disclosure and equitable division of property
Unless you have a prenuptial agreement in place, Maryland divorce law calls for an equitable division of joint assets. This doesn’t necessarily mean that property is divided 50/50 down the middle between spouses but instead, a fair settlement of all martial assets is sought. Any properties or assets owned prior to the marriage are considered non-marital assets and things like inheritances and gifts that were willed or given to a single partner are considered individual assets.
When you enter the divorce settlement process, financial transparency is a must. This type of honesty will help you and your soon-to-be-ex get through negotiations quicker. Having your finances outlined ahead of time cuts down on some of the leg work involved in the divorce mediation process. Getting accurate divorce financial advice means that both you and your ex will have an idea of what you own and what you owe.
2. Considering retirement accounts
One of the biggest mistakes a divorcing couple can make involves the splitting of retirement accounts. Some retirement plans also come with penalties for early withdrawals. If you are working with an expert in divorce finance, they can guide you through the process of drafting a qualified domestic relations order (QDRO) to shield your accounts from penalty. It’s also important to note that not all retirement accounts are governed by the same tax laws—a 401k is pre-tax money and treated differently than a pension plan just as the value of a Roth IRA differs from the already taxed value of the cash you have sitting in savings.
All this can make things muddy when it comes to dividing various accounts. Depending on how many jobs you have held during your marriage and whether you rolled them over as you’ve started a new position. Sorting through your retirement accounts can end up being a bigger undertaking than you might have anticipated. These are the types of financial details that are important to go over with a fine-toothed comb otherwise, things can easily slip through the cracks.
3. Additional tax considerations
If you are selling the marital home or dividing investment accounts, you must also consider the taxes involved in those sales. Stocks and ETF investments are subject to capital gains tax and the value of these accounts can go up and down over time—depending on the market. It could be a hard sell to divide these assets without selling them as you’d be gambling since it’s not possible to predict their future value, but that’s a bridge that you’ll have to cross when you get to it. Ultimately, whether or not you sell positions in your investment accounts or decide to divide them up will depend on the particulars negotiated during the settlement process.
Likewise some larger sales, like the family home, are subject to local tax laws. The state of Maryland has a 5.8% capital gains tax rate that applies to property sales—this means you’ll be looking at a capital gains tax of upwards of 30% (taking into account things like state and county transfer taxes).
4. Working with a Certified Divorce Financial Analyst
If you are seeking divorce financial advice, working with a Certified Divorce Financial Analyst® (CDFA®) or a CDFA®-Mediator is a great way to make sure that you leave no stone unturned when it comes to sorting through shared finances and dividing assets and debt appropriately. Weeding through your joint finances can be a particularly daunting task if you don’t have a solid background in finance and knowledge of tax law.
A divorce mediation financial consultant brings a certain level of financial expertise to the table and can relieve some of the stress associated with sorting through the particulars. Interested in learning more? Schedule a free strategy session.