Common Mistakes – Divorce Property Division
- Keeping a home you can no longer afford.
While staying put means one less change in the midst of an already life-altering event, it often makes little financial sense. Unfortunately, many clients keep their homes not realizing that upkeep costs are no longer sustainable Remember, there are now two households existing on the same income where previously there was only one.
- Taking the house in lieu of liquid assets.
If you are offered the house in exchange for your ex getting comparably valued investments — i.e., a retirement, bank, or brokerage account worth the same amount — think twice before agreeing. On paper the two may be equal, but practically speaking the house is far more costly to maintain.
- Not considering the tax implications.
Not all financial accounts are taxed the same way. For instance, if you get the 401(k) plan account worth $100,000 and your ex gets the checking account worth the same, you just got the raw end of the deal. Taking cash from the checking account incurs no tax, while any withdrawals from the 401(k) would be taxed as regular income to you. Many individuals forget to look at the complete cost of each asset, particularly the tax nature of each.
- Not getting a court order to get your piece of the 401(k).
If your soon-to-be ex has a 401(k) plan, you must have what’s called a qualified domestic relations order, or QDRO, to access your share. (Individual retirement accounts do not require a QDRO). This court order, which must get final approval from your retirement plan, marks one of the few times you can take money from a 401(k) without paying a 10 percent early withdrawal penalty. You will, however, pay income tax on the amount if you don’t roll it over to an individual retirement account within 60 days. Because the QDRO calls for extra paperwork and a separate order, there is an extra fee.
- No life insurance on your ex if you’re receiving support.
Depending on how heavily you rely on child support or alimony (aka spousal support), the death of your ex could leave you in a financial jam. Life insurance on the person, with you as the owner and beneficiary of the policy, can serve as protection against that potential loss of income. Ask yourself if you have the capacity to meet your financial needs if those payments were to stop.
