Most of us of are aware that divorce impacts virtually every area of your financial life. When assets are divided, major issues will need to be resolved, such as who will own the marital home, how the rest of the property will be divided, how much child support will be paid, and how much alimony (if any) the lesser earning spouse will be entitled to receive. Clearly, how you and your spouse decide to resolve these issues will have a major bearing on your finances going forward.
It is generally accepted conventional wisdom that, overall, getting divorced will adversely impact your financial situation. This is hard to avoid when you are essentially trying to maintain two households on the same income with which you were previously maintaining one. You now have two housing payments to make, double the utility bills, more food to buy, etc. So, from that standpoint, you will probably have to do some belt-tightening.
Although divorce can definitely be damaging to your finances, there are some potential financial benefits as well. Here are some little-known ways a divorce can improve your financial picture:
Early Penalty-Free Withdrawal from a Retirement Account
Divorce is one of the few times that someone under the age of 59 ½ can withdraw or transfer funds from an IRA, 401(k), or another type of personal retirement account without paying a penalty. Normally, you would be assessed a 10% penalty for taking an early withdrawal, but during a divorce with a qualified domestic relations order (QDRO), a penalty-free early withdrawal or transfer is allowed. You would still be responsible for any income taxes that would be due, however. You can avoid tax implications by transferring the retirement into another retirement account, like an IRA. In divorces this is typically seen where one spouse owes the other a significant sum to equalize the division of assets and debts. A common way to make that equalization is for one spouse to transfer a portion of his or her retirement into a retirement account held by the other spouse.
Help your Child Qualify for Financial Aid for College
One way that a divorce can help kids is when they apply for financial aid to go to college. The criteria for awarding aid through the Free Application for Federal Student Aid (FAFSA) is based solely on the financial information of the custodial parent, rather than both parents. In many situations, this can mean access to thousands of dollars more in aid that may not otherwise be available. It is important to note, however, that the government will consider any child support and alimony the custodial parent is receiving when determining how much aid a student qualifies for.
Help an Ailing Spouse Qualify for Medicaid
If someone has a spouse whose health is failing and they require long-term care, the costs associated with this care can quickly eat up all of their assets. One way to prevent this from happening may be to get divorced and leave the ailing spouse with very limited assets, enough that they can qualify for Medicaid assistance. This particular situation would be what is considered a “strategic divorce”, one in which the couple is still on good terms, but they are getting divorced for the express purpose of protecting their assets. This type of move could have unintended consequences, however, and you would not want to go this route without first seeking expert advice.
More Social Security Options for Divorcees
Some divorcees may be eligible to collect on their ex-spouse’s Social Security benefits when they reach retirement age without impacting what their ex-spouse receives. To qualify for these benefits, you must have been married to your ex-spouse for at least 10 years and be unmarried at the age of 62. Having this option would allow you to start collecting on your ex-spouse’s Social Security benefits at age 62 and switch to your own Social Security benefits at age 70 when they will provide the most benefit.
Avoid the Income Tax “Marriage Penalty”
This is a benefit for higher income couples. Couples who file jointly and earn at least $612,350 (as of 2019) pay a higher income tax than separate filers who are on the same level of income. Getting divorced and filing income taxes separately can save couples several hundred or even several thousand dollars per year, depending on their income.
Reset your Financial Priorities
Perhaps the most important financial benefit of getting divorced is one that is more intangible – the ability to fully control your finances and reset your priorities. The reason many divorces happen in the first place is because of fights over money, and many couples do not see eye to eye in this critical area of their lives. Divorce can offer the chance for a new financial beginning and an opportunity to make smarter economic decisions. And oftentimes, this can mean building more financial security and wealth, even on a tighter budget.
Cate & Brough, P.A.
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