When a once-loving relationship ends, both parties typically want the process to be over as quickly as possible. But an expedient exit can end up costing you in the short-term or long-term if you don’t understand the implications of all financial decisions.
Money is often at the root of marital discord, and making a poor decision during a divorce can be especially costly for high-net-worth individuals. In addition to working with an experienced divorce lawyer, it’s crucial to educate yourself about dividing complex marital assets.
Three money mistakes to avoid
Whether you are on the paying or receiving end of marital assets, mistakes often happen without the proper guidance. Many errors result from dividing these three items:
- Retirement funds: If you plan to access funds from a 401(k) to pay your spouse, you’ll likely face a 20% tax withholding plus a 10% penalty if you are younger than 59 ½. Instead, have your attorney draft a qualified domestic relations order, or QDRO, which will transfer the funds without tax consequences.
- Investment accounts: Taxes must also be factored in when stocks are used to pay a spouse. When the party holding the stock sells, they can face either short-term or long-term capital gains taxes. Those taxes should be subtracted from the stock’s value before it changes hands.
- The family home: Dividing a house can be relatively simple if both spouses decide to sell and split the proceeds. However, in many cases, one party wants to remain. First, they should make sure they qualify for a mortgage and can afford monthly expenses going forward. In addition, they should be aware that if they later sell the home, they alone will be responsible for paying capital gains taxes on a profit exceeding $250,000.
Protect your future by doing some homework
Divorce can be an emotionally devastating process, but it’s crucial not to let your emotions cloud judgments that can hurt you in the long run. Working with a knowledgeable attorney, and understanding how these and other assets are divided, can help achieve the best outcome possible for your new life.