06/01/2012 - Divorce is rarely a life event that one plans for, but while many couples live happily ever after, some will undoubtedly go their separate ways. A divorce can be emotionally devastating, but it doesn't have to derail your long-term financial security. If you're facing a divorce, consider these steps to protect and claim what's yours.
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Understand your assets.
A divorce can be expensive, especially if you fail to spend the appropriate amount of time reviewing and discussing your finances as you go through the process. Educate yourself by examining investment and bank statements, qualified plan and pension information, tax returns, mortgage information and insurance policies. Before you can begin to split the assets you've accumulated as a couple, you should know your total net worth so that you'll be able to assess how the divorce will impact your financial goals.
Consider the big picture.
When deciding how to split the nest egg, it helps to look into the future and think about how your lives will look post-divorce. Will you have short-term needs – like buying a home and furniture, new or continued childcare costs or paying a lawyer – that require immediate funding? Will you be able to replenish your retirement assets if you must use them to pay for these unexpected expenses? Develop a detailed written financial plan as a soon-to-be single so that you may act in your best interest when deciding which assets will best fit your needs.
Think about tax consequences.
Most retirement plans are made up of pre-tax dollars, meaning your contributions won't be taxed until you withdraw them. This can be beneficial if you believe your income and tax rate will be lower in retirement – but it also means the amount of cash you'll be able to use to meet your day-to-day expenses will be less than what you actually withdraw.
Be sure you're aware of how taxes may affect your retirement income as you divide assets with your former spouse. Trusted financial, tax and legal advisors are especially valuable as you make such important decisions.
Follow the rules.
If you decide that it makes sense to divide funds from you and your former spouse's 401(k) plans and IRAs, it's important to carefully follow state and local guidelines. This process is complicated so be sure that your divorce settlement states specifically how assets are to be divided and transferred.
Dividing a pension or 401(k) plan may require a Qualified Domestic Relations Order (QDRO), which allows funds to be withdrawn without penalty and deposited into a separate retirement account. Make sure that you discuss preparation of such an instrument with your attorney.
Update your financial accounts.
Once your divorce is final, revise the beneficiaries on your checking and savings accounts, investments, retirement plans and life insurance. Also reevaluate your insurance policies and confirm that you still have adequate coverage for you and any dependents. Nothing can undermine your financial security faster than an uninsured accident or illness. Once the dust has settled on your divorce, create a new will or update the existing document to reflect your new marital status.
Seek expert advice.
It's no doubt that your attorney will play an essential role in your divorce proceedings, but don't assume that he or she is a financial expert. Consider working with a financial advisor who can help you with all aspects of your financial life before, during and after your divorce.
Let's face it…there's no sure thing when it comes to marriage. But even if you end up going at it alone, it doesn't have to mean the end of your financial security. With the help of trusted professionals and determination, you can face the new financial situation that your single life will bring.
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