Divorce Financial Planning and Retirement
Divorce financial planning typically refers to the actual planning done during a divorce. When planning for retirement, there are certain aspects that you should be aware of if you have ever been divorced at some point in your life, even if you are now married.
Of course, this is in addition to the many aspects that you must consider whether you are divorced, widowed, married, single, etc.
Divorces usually involve attorneys because there is legal complexity. Likewise, many of the financial planning topics discussed here are complex, and the general situations may not apply to you. Please consult a qualified professional regarding your own circumstances.
Taxes and Divorce
Beginning January 1, 2019, alimony is not deductible from the income of the payer spouse and not includable as income to the receiving spouse. This is not true for divorce or separation agreements entered into before January 1, 2019 unless it is modified.
This can create an opportunity where the receiving spouse shows little to no income from a tax perspective. If this is you, Roth conversions of retirement accounts or capital gains harvesting can make a lot of sense.
The idea is that it can make sense to pay more tax now if it allows you to pay less overall. You may even be able to pay a 0% tax rate on capital gains. This generally involves multi-year projections and planning to determine whether or not the strategy makes sense for you.
Beginning in 2018, there is now a $2,000 child tax credit available. By estimating the tax situation of each parent, there can be an opportunity to decide who should claim this credit. Be sure to speak with a tax professional to make sure this gets done correctly.
Divorce and Retirement
If you were married for 10 years or more and haven’t remarried, you are eligible to receive Social Security as a divorced spouse. You must be at least 62, and you will only benefit if the amount is more than you qualify for on your own benefit. You can still do this even if your ex remarries.
You may also qualify for survivor’s benefits if your ex dies. Many of the same rules apply, but you can qualify as early as age 60.
Divorces often involve the splitting of assets. You will want to make sure you do everything by the book to maintain the tax advantages of retirement accounts. You’ll usually need a Qualified Domestic Relations Order (QDRO) for qualified accounts, including pensions, and IRAs will usually require some sort of documentation to avoid tax consequences.
You will want to have the QDRO applied as soon as possible to avoid any scenarios that could have any adverse impact on your finances.
Divorce and Estate Planning
Your ex-spouse was probably named in all your estate planning documents, so it’s important that you review and update your Will, Power-of-Attorney, Advance Directive, etc.
Also be sure to update and review your beneficiary designations on a regular basis. Although there are some exceptions, beneficiary designations will usually overrule your Will.
If you plan to get married and become a blended family, it is shockingly easy to disinherit your children without proper estate planning.
Many states have laws that give the spouse rights over your children so careful planning must be done to ensure your money is going to your intended recipient. Prenups and postnups are awkward to discuss, but they can be a great tool in this situation.
The Non-Financial Spouse
In many households, there is a financial spouse and a non-financial spouse. The financial spouse typically takes the lead in managing the household finances. Unfortunately, this creates an opportunity for unscrupulous salespeople masquerading as advisors to take advantage of the non-financial spouse.
One way to mitigate this risk is to work with an advisor that is legally obligated to act as a Fiduciary at all times, not just some of the time. These financial advisors will be Fee-Only, not fee-based, and won’t sell products for a commission. If you’re curious, you can learn more about the difference in Fee-Only vs. Fee-Based advisors.
Are you divorced? How did divorce impact your finances? Had you planned differently, would the impact have been smaller? If you are remarried, have you considered estate planning? Please share your stories and thoughts and let’s have a conversation!