The seven worst financial mistakes you can make during your divorce.
1) Making a major purchase – Perhaps a new house? A new car? These are purchases that may impact your situation negatively. For example. You are currently living in a $300,000 house. You purchase a $200,000 house. Keep in mind, that your combined income with you and your spouse paid for the $300,000 house. You just added a significant expense.
2) Selling highly appreciated stock for cash flow – Right now it might seem like a good idea. You think, “I can always put this money back once things settle. And I need the money now to pay attorneys and for cash flow”. With a significant capital gain, and no losses to offset, your tax bill may be quite high.
3) Not taking into account the tax implications of spousal support – So you’ve got an agreement in place, and your spouse is paying you alimony. Your spouse gets to take those alimony payments as a reduction in his or her taxable income. Guess what that means? You now have to pay taxes on that income. This can be especially troublesome if you haven’t planned correctly. Make sure you account for this, either by setting up a separate account that will pay the taxes, or by adjusting your payroll deductions.
4) You don’t withhold taxes from the 401k distribution – Ok, so you need some money to pay off bills (attorney, credit cards, etc.) that you accumulated during this process. So when the time comes to receive a distribution from your spouse’s 401k, you cash out some (or ALL!) and do not have taxes withheld. Once again, when Uncle Sam comes knocking, you will owe a large tax bill.
5) Assuming “getting the house” is the best deal – You’ve all seen the tabloids and the newspapers looking at the high profile divorces. People will say, “Well, she got the house, so she made out like a bandit”. Unfortunately, not all assets are created equally. The “house”, which in this case is the marital home, may be a money pit, may have negative equity (especially in this economy), or may just be too expensive for one spouse to maintain. Make sure you consider all of the options, including selling the house, before you make this decision.
6) Quitting your job so you don’t have to pay alimony – While this might seem like a good idea, all it is going to do is get you in trouble with your spouse and the courts. You will still be required to pay alimony. You don’t get a free pass here. What this will do is make you look less sympathetic.
7) Not planning – The biggest mistake you can make is not actually planning. Divorce is a confusing time, and you often are not thinking rationally. A good plan will prevent a lot of things from going awry and ruining your financial situation. Stop, take a deep breath and consult someone who will help you to navigate the complex financial issues that are associated with your divorce.