Divorce is not only emotionally taxing, but it is also financially taxing. It is often a time of emotional instability, stress and anxiety about the future. Economic costs can add to the stress of the overall situation. While one might expect two homes to be more expensive to maintain than her one, there are also lesser-known associated costs. Understanding these hidden costs can help you make more informed decisions and prepare for the financial impact of divorce.
This article details three areas where the hidden costs of divorce can surface: health insurance, retirement accounts, and real estate. Each aspect plays an important role in a couple’s financial stability, and splitting assets can lead to unexpected expenses and complications. By recognizing these potential pitfalls, individuals can better prepare for the financial impact of divorce. Plus, knowing about these hidden costs can help you navigate the complicated divorce process with confidence and give you a better sense of how to protect your financial future.
Hidden Divorce Cost #1: Get Health Insurance
If you previously had health insurance provided by your spouse’s employer, it may be expensive to purchase new health insurance on your own. Insurance premiums, deductibles, and copayments may increase, increasing your financial burden.
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COBRA coverage may be available for up to 36 months post-divorce, but is usually more expensive than spousal coverage. Therefore, comparing rates from other sources, such as state health insurance exchanges, is essential to finding the best option for you.
If you are employed, it may be cheaper to sign up for your employer’s plan than to pay the premiums charged by your ex-spouse’s plan. Most plans do not allow employees to purchase or change policies outside of an annual period called open enrollment, but exceptions are made for major life changes, including divorce. .
Hidden Divorce Costs #2: Splitting Retirement Accounts
Splitting your retirement account is an important aspect of the divorce process and can have unexpected costs. A Qualified Domestic Relations Order (QDRO) is required to transfer funds from one spouse’s Workplace Retirement Plan to another spouse’s Workplace Retirement Plan. A QDRO is a legal document that defines how retirement assets should be divided. The preparation of this document by a QDRO specialist may cost her over $1,000 and must be approved by the plan. Additionally, each company’s plan requires a separate QDRO for her, which can further increase costs.
Rather than splitting the company 401(k), splitting the IRA may be a cheaper option. The Internal Revenue Code (IRC) provides that the distribution of an individual retirement account (IRA) may be required in a divorce decree or family court-approved marital property settlement agreement and may be incorporated into a divorce decree or judgment. .
Hidden Divorce Costs #3: Property Transfers and Mortgage Refinancing
When one spouse buys another’s share in a real estate transaction, many unexpected expenses can arise. As the parties have an incentive to oppose the quoted price, it is advisable to obtain an objective third-party appraisal of the property’s value. Sellers want to quote as high a price as possible, while buyers want a lower price.
In addition, you may be subject to transfer taxes or other fees when transferring property ownership from one spouse to another. For example, New York City interest rates range from 1% to 1.425%, plus the New York State surcharge. Therefore, it is important to consult a real estate attorney or tax professional to understand the applicable taxes in your area.
Also, if one spouse decides to keep the property and the other off the mortgage, a mortgage refinance is usually required. Buyers must independently qualify for a mortgage and may incur additional costs such as application fees, closing fees, appraisal fees, and possibly upfront penalties.
Additionally, mortgage payments are often higher in the current rising interest rate environment, increasing the overall cost of maintaining a property.
Secure your financial future
Divorce can be a financially difficult experience with many hidden costs and can leave individuals feeling overwhelmed and unprepared. Potential expenses related to health insurance, retirement accounts, and real estate can quickly add up and create significant financial burdens if not anticipated and planned. To navigate this complex process effectively, individuals need to be aware of these potential pitfalls and take appropriate steps to mitigate their impact on their financial future.
To ensure a more secure financial outcome, it is imperative to consult a professional who can provide guidance and support throughout the divorce process. Attorneys, financial planners and tax professionals provide valuable insight and advice on managing the many financial aspects of divorce, helping individuals make informed decisions to protect their financial well-being. To do.
By proactively seeking professional help and fully understanding the hidden costs associated with divorce, individuals can be better prepared for the financial aftermath of this life-changing event and help their economies. You can protect your future.
This article was written and presented by our contributing advisors, not the Kiplinger editorial staff. You can check your advisor’s record with the SEC or FINRA.