How Will Divorce Affect My Finances?

If you are planning to divorce, it’s important to understand the implications of separating your finances. While getting all your questions answered before you file or go to court is preferable, it’s not too late to take financial planning steps after the divorce.

One of the biggest surprises may be how much it will cost to live independently. To maintain your current lifestyle, you would need an increase in your income—both men and women; however, women tend to experience bigger financial impacts.

Obviously, increasing your income is not always a possibility, so financial planning before, during and after a divorce is key. So is understanding the actual costs of divorce.

Financial Planning for Divorce

Many people think about the emotional toll or the impact divorce can have on their children and themselves, but they may not consider the true financial fallout. Here are key questions to consider before filing (or if you’ve been served with divorce papers).

1. How Much Will the Divorce Cost?

The cost of a divorce varies depending on the conflict. Uncontested divorces—where both parties agree on all aspects of the separation—are about a third of the cost of contested divorces.

Legal fees for divorce are only a small part of the financial impact to consider when you are ending a marriage.

2. What Will My Monthly Expenses Be When I Live Alone?

Many Americans don’t track their household spending—only 34% say they do.³ If you haven’t done so, list all your household’s monthly expenditures. Note what you pay monthly for housing, groceries, transportation, kids’ needs, clothing and other categories. Then, use this information to make a post-divorce budget.

Most couples find that each of their individual expenses exceeds their share of the marital expenses. For instance, if you replace one home with two, your mortgage or rent costs will likely increase. If you have young children, daycare expenses might skyrocket without the ability to share child care duties.

An event like divorce can drastically change your needs and “plan” for taking care of basic expenses.

Failing to follow an appropriate budget can lead to further financial stress in an already difficult situation and potentially cause you to draw from investment assets for support. Doing so at an accelerated pace may cause premature distribution penalties and other tax implications.

3. Can I Keep My Home After the Divorce?

Many of us are attached to our family home, especially if our children live there. You may want the kids to continue at their current schools. However, fixating on keeping the house may distract you from things to consider as you negotiate property settlements.

Although staying in your home is usually an emotional decision, you must also consider the financial implications: Can you afford the mortgage, taxes and upkeep? Budgeting will also help you determine whether keeping the house will be worth it.

4. How Will Divorce Affect My Credit Rating?

Although divorce settlements can assign marital debts to each individual, a divorce decree can’t necessarily keep those debts off your credit report. This means that even after the divorce, if your ex fails to make payments, it may hurt your credit score. To avoid such surprises, you can convert shared accounts to individual accounts when possible, and check credit reports often.

What if your accounts were all in your spouse’s name and you never built your credit history? You might find yourself unable to get a credit card, rent an apartment or get a mortgage. To prevent this, establish a credit account in your name before divorce, if possible—and make payments on time.

5. What About Health Care Post-Divorce?

Unfortunately, if your insurance coverage is through your spouse’s employer, you will likely lose it when you divorce. While you can extend your coverage using COBRA, this can often be expensive.

If your employer offers a health care plan, you may be able to enroll simply by checking with your benefits department. Divorce is considered a qualifying life event (QLE) and provides a special enrollment period so those impacted won’t have to wait for the open enrollment period.

If this is not an option, you can buy a plan under the Affordable Care Act. You can also check to see if your post-divorce income qualifies you for Medicaid coverage .

6. What Should I Know About Planning for Retirement Solo?

You and your spouse may have had a date in mind when you would be financially ready to step back from full-time work. You now need to calculate a whole new scenario as you plan for retirement. These major lifestyle changes can drastically impact your goals, time horizon and suitable level of risk for your investments.

When dividing marital assets, remember to include retirement accounts. This is especially important if one spouse—statistically likely the wife—saved less for retirement in their own name. Your property division should include all IRAs, 401(k)s and other retirement accounts. You will need a specific court order, a qualified domestic relations order (QDRO) , to carry out the division.

Also, remember that you may be entitled to part of your spouse’s future retirement benefits, including Social Security and pensions.

7. Can I Use QDRO Money to Pay for a New Home or Other Expenses From the Divorce?

If you need money immediately, you may use all or a portion of the funds distributed from a QDRO. However, it's important to understand the implications of each distribution option and how it may reduce your retirement savings and impact your tax footprint.

Generally, money from a qualified plan distributed directly to an ex-spouse is not subject to the 10% early withdrawal penalty. However, income tax rates still apply. Pretax retirement assets may remain invested for future support and non-retirement assets you don’t need immediately may potentially be contributed into an IRA from the distribution to take advantage of tax-deferral benefits.

8. How Are Alimony and Child Support Payments Taxed?

Today, alimony and child support payments are not tax-deductible by the person making them and are also not reported as income by the person receiving them.

9. Are There Special Financial Considerations if I Divorce Later in Life?

Many people over 50 find themselves in a “gray divorce.” Even though the divorce rate in the U.S. is dropping for most age groups, the rate is growing for older couples. A later-in-life divorce, where you’ve shared many assets over several years, may require a new look at money. And, you’ll have less time to potentially rebound from the impacts of divorce, so financial planning forward will be key.

Knowing all your pre-divorce assets and liabilities will help you understand your financial situation post-divorce. Retirement planning in your new single situation will be critical, as will your plan for Social Security.

10. What Can I Do Now to Improve My Post-Divorce Finances?

If your split is amicable, consider making financial moves together to prevent some post-divorce financial suffering. From these, create your own financial checklist before the divorce.

Don’t forget to check in with your employers and change your withholding allowances. If you have been claiming a personal allowance for your spouse and you divorce or are legally separated, you must give your employer a new Form W-4, Employee’s Withholding Certificate. You must do so within 10 days after the divorce or separation.

For more information on withholding and when you must furnish a new Form W-4, see Publication 505, Tax Withholding and Estimated Tax .

Financial Planning After Divorce

Regardless of how amicable the divorce may be, some people feel loss, while others look forward to a new chapter—you may feel both. The emotions are normal. A financial plan for your finances can help you feel more confident as you look forward. In addition to helping you adjust to your new situation, a plan can help you make informed financial decisions as you lay out the next steps for your future.