Divorce is not only emotionally challenging, but also financially draining. It is often a time of emotional upheaval, resulting in stress and anxiety about the future. Financial costs can add to the overall stress of the situation. While you may expect that two households will cost more to maintain than one, there are less well-known related costs as well. You can make more informed decisions and prepare for the financial impact of divorce by understanding these hidden costs.
This article will explore three specific areas where hidden costs of divorce can surface: health insurance, retirement accounts and real estate. Each aspect plays a significant role in a couple's financial stability, and the division of assets can lead to unforeseen expenses and complications. By being aware of these potential pitfalls, individuals can better prepare themselves for the financial consequences of divorce. In addition, knowledge about these hidden costs allows people to navigate the complex divorce process confidently and better understand how to protect their financial future.
Hidden divorce cost #1: Getting health insurance
If you were previously covered under your spouse's employer-sponsored health plan, obtaining new health insurance for yourself can be costly. Premiums, deductibles and out-of-pocket expenses may increase, leaving you with a higher financial burden.
COBRA coverage may be available for up to 36 months after a divorce, but it is typically more expensive than the coverage you had as a spouse. Therefore, comparing rates from other sources, such as your state health insurance exchange, is essential to find the best option for you.
If you are employed, you may find signing up with your employer's plan less expensive than paying premiums charged by your ex-spouse's plan. While most plans do not allow employees to join or make changes to coverage outside the once-yearly period known as open enrollment, exceptions are made for significant life changes, including divorce.
Hidden divorce cost #2: Dividing retirement accounts
Dividing retirement accounts is a critical aspect of divorce proceedings that can involve unexpected costs. When transferring funds from one spouse's workplace retirement plan to another, a qualified domestic relations order (QDRO) is necessary. A QDRO is a legal document that outlines how retirement assets should be divided. The preparation of this document by a QDRO specialist can cost over $1,000 and must be accepted by the plan. In addition, a separate QDRO is needed for each company plan, which could increase costs further.
Dividing an IRA rather than a company 401(k) may be a less expensive option. The Internal Revenue Code (IRC) stipulates that the distribution of an individual retirement account (IRA) can be mandated in a divorce decree or a marital property settlement agreement sanctioned by a family court and integrated into a divorce decree or judgment.
Hidden divorce cost #3: Transferring real estate and mortgage refinancing
There could be many unexpected costs if one spouse buys out the other's share in a real estate transaction. Obtaining an objective third-party appraisal of the property's value is recommended, as the parties have opposite incentives for the estimated value. The seller would want to estimate the highest possible price, while the buyer would prefer a lower price.
Moreover, transfer taxes or other fees may be imposed when transferring property ownership from one spouse to another. For example, New York City's rates range from 1% to 1.425%, plus additional rates for New York state. Therefore, it is crucial to consult with a real estate attorney or tax professional to understand the applicable taxes in your area.
Also, mortgage refinancing is typically required if one spouse decides to keep the property and remove the other from the mortgage. The buyer must qualify for the mortgage independently, and additional costs, such as application fees, closing fees, appraisal fees and potential prepayment penalties, may be incurred.
Furthermore, mortgage payments will often be higher in the current rising interest rate environment, increasing the overall cost of keeping the property.
Securing your financial future
Divorce can be a financially challenging experience with many hidden costs that can leave individuals feeling overwhelmed and unprepared. The potential expenses related to health insurance, retirement accounts and real estate can add up quickly, creating a significant financial burden if not anticipated and planned for. To navigate this complex process effectively, individuals must be aware of these possible pitfalls and take appropriate steps to mitigate their impact on their financial future.
To ensure a more secure financial outcome, consulting with professionals who can provide guidance and support throughout the divorce process is essential. Attorneys, financial planners and tax experts can offer invaluable insight and advice on managing the various financial aspects of divorce, helping individuals make informed decisions that protect their financial well-being.
By proactively seeking professional assistance and developing a thorough understanding of the hidden costs associated with divorce, individuals can better prepare themselves for the financial aftermath of this life-changing event and safeguard their financial future.
Sara Stanich is a Certified Financial Planner practitioner, Certified Divorce Financial Analyst (CDFA), Certified Exit Planning Advisor (CEPA) and founder of Cultivating Wealth, an SEC-Registered Investment Adviser. Sara has been a financial adviser since 2007, which followed 12 years in marketing roles and an MBA from New York University. She is a frequent source for the financial press, and has been quoted in Investor’s Business Daily, U.S. News and World Report, and CBS News. After over 25 years in New York City, Sara recently moved to the beach with her husband, three kids and Labrador retriever. She frequently blogs at cultivatingwealth.com.
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