Sorting Finances After Divorce

Transitioning assets while going through a divorce doesn’t have to be overwhelming. Our experience-based tips will give you some ideas on your options. 

In California, a divorce will take six months from the date of filing for divorce. During this difficult time there are a number of financial options and decisions that could greatly impact you in the future. Here are a number of important areas to pay attention to. I hope this list eases some of your questions. I’m sorry you are facing this challenging situation. I have been in your shoes and am happy to answer any questions you may have. 

Know Your Choices

You will want to carefully evaluate all of your investments and assets to determine what options you have. If your retirement funds are in your spouse’s name, you could transfer the funds to an IRA in your name through a Qualified Domestic Relations Order (QDRO) if you have a 401k plan. A QDRO is a special type of court order that divides certain retirement plan benefits in a divorce. Assets transferred with a QDRO are usually exempt from the 10% early-withdrawal penalty. There is also an option where you could have a portion of the funds paid directly to you rather than going into your IRA. This would trigger a tax on those funds but no penalty. You could also take retirement distributions over a period of time or convert assets into a Roth IRA depending on your situation.  You don't need a QDRO to divide Individual Retirement Accounts (IRAs), deferred annuities, or government retirement plans 

Marital settlement agreement usually works for an IRA to be rolled over from the ex-spouses plan.  Another option is to consider a ‘buy-out’ instead of dividing the retirement plans. 

Protect Your Assets

Some women trust what their husband recommends without question and then find later they drew the short end of the stick because they didn’t press for more information. The financial agreement isn’t as black and white as it appears and each choice has consequences. For example, if you let your husband keep the retirement assets but you take non-qualified assets, the husband with the qualified account could face more taxes down the road when he takes distributions.  And the non-qualified assets could have more taxes initially. The best idea could be to split it down the middle to take some qualified and some non-qualified assets so you spread out your tax obligations over the years.  

You could opt for alimony payments over a split of assets. However, if you take alimony payments, your spouse could always go back and request for them to be lowered for a variety of reasons. For example, if the high earning spouse is planning on retiring in three years they could ask for a decrease at that time and tell the courts they don’t have the same income and can’t pay it anymore. Carefully examine each option before deciding! 

Remember Your Long-Term Needs

Now is a great time to evaluate your goals and what is important to you. How can your settlement align with your personal goals and needs? Don’t just focus on a short-term payout. Evaluate what is more valuable to you. A lifetime alimony arrangement may be more beneficial to you than a lump sum. This could act as your pension in retirement. 

Get Help

There are a variety of professionals who can help give you guidance during this time. Whether it is a financial advisor to help you sort out your financial options or an attorney to show you your legal rights. You could also look into using a mediator instead of an attorney to be a neutral party who can give you information along the way. 

I’ve been in your shoes! Watch my video for more tips on what to keep in mind as you navigate your divorce. 

As always, we welcome any questions you may have about your finances. Reach out to Deb to review your situation and gain some perspective on what your options are.