When couples split up, it hardly ever ends up 100% friendly. While most people think about the emotional strain of divorce, the financial assets of the couple including their retirement accounts must get split up as well. Making the wrong financial choices during a divorce can cause a great deal of financial strain down the road. It could lead to unnecessary taxes and penalties as you continue to work toward your financial goals. Here are five mistakes to avoid financially when going through a divorce.
- Update Your Beneficiaries– One of the biggest mistakes I see after a divorce is the failure to update your beneficiary information. It’s likely that your ex was the primary beneficiary and you never named contingent beneficiaries. It’s a good time to go back and determine what family members should be on your beneficiary designations as your IRA’s and life insurance contracts are an operation of law at death. They will go exactly to the people you will list on the accounts. Don’t let your ex get the funds because they probably will if you don’t change this designation.
- Calling All QDRO’s–Until you go through a divorce, you probably won’t hear the term Qualified Domestic Relations Order (QDRO). Retirement plan assets can be split up this way if done correctly without penalty through a divorce or mediation agreement. Most 401(k) and IRA administrators will be fully equipped to handle these transfers. In some plans monies can be paid immediately while others can only be done when your spouse technically retires.
- Check Your Credit– After a divorce, most spouses don’t go back to check and rebuild their own personal credit score. It may have been true during the marriage that your credit score was completely nonexistent because most of the credit was in the name of your spouse. Once you get separated, make sure you go to www.annualcreditreport.com and get your credit score. Then, you should begin to establish credit, use credit, and promptly pay off credit to build up your FICO score. Don’t forget as well about splitting up those frequent flyer miles which can be very big if your spouse or you traveled a lot during the marriage.
- Get Your Funds Invested– If you receive part of your spouse’s IRA, it is extremely important that the money is immediately rolled over into your IRA or you could be subject to the 10% early withdrawal penalty. If you also got stocks, bonds, or other investments through the divorce, it is probably a good time to consider if they are the right investments and what the allocation should be for your future.
- Assess Your Real Estate– I have seen this many times, but if you are the spouse that retained a lot of the real estate and not the cash it may be time to assess just how much house you really need. One huge mistake is to hold on to a large property that can cause you a ton of maintenance and upkeep that you simply cannot afford. You may have also received land or other vacation property that could cause you cash flow issues if not managed properly.
Hopefully these five tips can help you avoid key financial mistakes people make in a divorce.
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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.