The 3 Biggest Financial Mistakes You Can Make
The list of potential financial mistakes made while divorcing can be extensive. It is an exhausting, emotional time for everyone. Every money decision is emotional to begin with, and this stress just adds to the mix. Divorce and finances can become complicated and dividing assets can be complex, which is why the finance industry CDFA © designation exists. Long ago, lawyers used to divide assets on a spreadsheet. But as finances grow in complexity, it is important to talk with your accountant on how to prepare for divorce financially and to have a CDFA do the work for you.
Here are 3 of the most common traps people fall into:
1. Fighting to Keep the Home
Home is a heartwarming word. Home is where memories are made, and where we feel safe and secure. It is natural to want to stay. The first question you need to ask yourself is ,”Can I afford to stay in this home?” Note that if you refinance under your name only, you will own all the debt.
Is your credit score strong enough to qualify for a mortgage by yourself? What will the monthly payment be? What are all the other household expenses you will have like property taxes, utilities, repairs, condo fees, etc.
It will all be on you now. Even if you are receiving alimony, it may not be enough.
If the home needs to be sold, it is often better to consider doing it while you are still together. Then each of you can qualify for capital gains of $250,000, reducing taxes owed on the difference between purchase and sale price.
2. Dividing Assets Based on Equal Value
A $500,000 house is not equal to a $500,000 IRA. For example:
- The costs of maintaining a home are much greater than maintaining an IRA.
- An IRA when distributed will be taxed as income, whereas a home will be taxed at a capital gains rate which often may be less.
- Homes typically grow in value at a lower rate than an IRA invested in the market.
When you divide your assets, its important to consider your current and future income brackets, taxes on the assets, ongoing costs, and lifestyle needs.
3. Not Renaming Assets before the Divorce is Final
If you are receiving assets such as a home, investments, retirement funds, a pension – it is super important to ensure your name is on these items before your divorce is final. For pensions, it is very important to ensure a QDRO (Qualified Domestic Relations Order) is accurate and filed. If not, your rights to a portion of your spouse’s pension may not be in place. This could mean a significant loss of income in later years.
A friend left her name on a line of credit with her ex-husband. He purchased a $25,000 engagement ring for his fiancé using that line of credit. If he were hit by a bus tomorrow, my friend would be paying for the ring. How unfortunate is that?
If you are splitting debt, make sure your name is off the debt going to your spouse, otherwise you could be held accountable to pay it. It will also affect your credit score if your name is on the debt and your spouse does not pay it off responsibly.
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