Learn the top financial mistakes women need to avoid when going through a divorce
Savvy Ladies Helpline Volunteers share their answers to some of the divorce financial questions they receive from women who are seeking answers on how to proceed and plan for a divorce so as to avoid the top financial mistakes along the divorce journey and achieve financial well-being for themselves and their children.
While divorce, separating, or exploring how to proceed can be a daunting process, Savvy Ladies provides the tools and resources to help women identify a plan, outline assets, net worth, family financial budgets, and important documents to gather to prepare financially along your divorce journey. The Savvy Ladies Volunteers have great advice to share and help set you up to avoid some of the most common mishaps along the way. Our goal is to help you prepare and answer your divorce financial questions so you can succeed, be more confident, and achieve a sense of financial well-being.
Savvy Ladies Helpline Volunteers share common divorce mistakes to avoid
We asked the Savvy Ladies financial professional volunteers what some common financial mistakes to be aware of so as to better prepare yourself during the divorce process so YOU can avoid them upfront!
Helpline Volunteer Jacinta Gauvin shares: Not knowing what they have before they start the process. Too often, I talk to women who, only after the divorce, realize they left assets on the table. It’s so important to take stock of everything in both of your retirement accounts, joint accounts, debt, properties, etc.. because the second the D word drops, things begin to disappear.
Neglecting the Financial Impact of Retaining the Primary Residence: Holding on to the primary home without fully understanding the financial consequences can lead to significant missteps. For instance, in many cases, the spouse wishing to keep the house may need to buy out the other, potentially straining liquidity requirements further, states Helpline Volunteer Hazel Secco.
Laurie Itkin, CDFA shares it is important to consider taxes when calculating the true value of an asset; one party insists on keeping the marital residence without investigating whether the mortgage will need to be refinanced at a much higher interest rate, not preparing for how to increase income or reduce expenses once child support or alimony is reduced or terminated.
Helpline Volunteer Jamie Lima shares the most common mistakes he coaches clients to be aware of so as not to be blind-sighted are:
Overlooking Tax Implications in Asset Division: Failing to account for tax implications during asset division is a common error. It’s important to recognize the distinction between various account types, such as pre-tax accounts like IRAs and 401ks, and after-tax accounts like Roth IRAs and non-C14qualified accounts. These differences can significantly impact the after-tax value of the assets and should always be taken into consideration.
Not understanding your marital finances. Many people don’t have a clear understanding of their financial situation, especially if one spouse has always handled the finances. It’s important to gather all of your financial documents, including bank statements, credit card statements, tax returns, investment accounts, and retirement accounts. This will give you a better picture of your assets and debts.
Underestimating your expenses. When you’re dividing up your finances, it’s important to accurately estimate your monthly expenses. This includes things like rent or mortgage payments, utilities, food, transportation, and childcare costs. If you underestimate your expenses, you may not be able to make ends meet after the divorce.
Nicky Amore, shares the need to have a financial plan in place, so people can have a roadmap for life after divorce. The tax implications of alimony, child support, and property division can significantly impact both parties’ financial situations, and by having a plan, people can ensure the assessment of assets is as accurate as possible. Plus, it is also key to address joint debts and credit issues promptly can also result in financial difficulties. The accurate assessment of assets and liabilities is essential to ensure an equitable division of assets.
Taxes often are an oversight and need to be addressed
Volunteer Sandra Giudici shares, several key mistakes often made in divorce are related to taxes that are not considered when dividing assets, especially equity assets.
Incorrect allocation of separate property interest in real estate. In several states, if the down payment was made with funds acquired before the marriage, the spouse who made that down payment is entitled to receive the down payment back before the shared division of the remainder of the proceeds of the house.
Treating pre-tax and after-tax retirement accounts equally. Couples often do not distinguish between Roth IRAs which are distributed tax-free once withdrawals are made, and traditional IRAs and 401(K)s, 403(B)s whose withdrawals are subject to the ordinary tax rate. This is a discrepancy in retirement that may reduce the value of the taxable accounts by over 22%.
Failing to identify the tax burden on unrealized gains in a brokerage account. There are often unrealized gains in positions held in brokerage accounts that will be taxed at the capital gains tax rates. The amount of gains inherent in any division of assets should be taken into consideration as the net reduction in valuation could be inequitable. The cost basis of each position should be considered to determine the net effect of the taxes.
Failing to tax-affect employee stock compensation such as restricted stock options, incentive stock options and non-qualified stock options. These are treated in different ways by the IRS and the net valuation should consider the employee’s effective tax bracket when determining the true valuation of the options.
Divorce is a financial transaction
Volunteer Myra Alport notes that it is important to see divorce as a financial transaction, not with emotional strings attached that can blur prudent decision-making. While this is completely understandable, the better able you are to set aside your emotions, the more clearly you can face the important financial decisions facing you. Myra notes the following divorce financial mistakes to avoid for women to help achieve financial well-being:
- Having little to no awareness of household expenses and income
- Wanting to maintain the same lifestyle post-divorce
- Being too trusting of your spouse’s intention to “handle everything fairly.”
- Not thinking about your long-term future expenses and income sources
Volunteer Debbie Cady sums it up: one of the most common mistakes people make in a divorce is not being aware of the other spouse’s financial situation. More often than not, one spouse will withhold information or documentation relating to assets, income, or both.
One of the most important step to surviving divorce is proper financial planning before the settlement is final. This includes child support and alimony. You can take our free online financial courses to learn more, click here: free financial literacy courses and navigate to the divorce learning selection.
Take the Savvy Ladies free online divorce course, this is what you will learn
- Introduction to Financial Considerations in Divorce
- Understanding Child Support
- Understanding Alimony
- Negotiating Alimony
- Some Action Items to Consider before Your Divorce Is Final
- Summary of Financial Considerations in Divorce
And at any time, please feel free to visit the Savvy Ladies Free Financial Helpline and ASK your divorce question and get connected to one of our pro bono volunteers.