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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
-
Donating Complex Assets Doesn't Have to Be ComplicatedIf you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Travel trends you can expect this summerThe Kiplinger Letter Domestic trips will trump foreign travel amid economic uncertainties, though some costs are down.
-
Donating Complex Assets Doesn't Have to Be Complicated
If you're looking to donate less-conventional assets but don't know where to start, this charity executive has answers, such as considering a donor-advised fund (DAF) for its tax benefits and ease of use.
-
Think a Repeal of the Estate Tax Wouldn't Affect You? WrongThe wording of any law that repeals or otherwise changes the federal estate tax could have an impact on all of us. Here's what you need to know, courtesy of an estate planning and tax attorney.
-
In Your 50s? We Need to Talk About Long-Term CareMany people don't like thinking about long-term care, but most people will need it. This financial professional recommends planning for these costs as early as possible to avoid stress later.
-
Social Security Pop Quiz: Are You Among the 89% of Americans Who'd Fail?Shockingly few people have any clue what their Social Security benefits could be. This financial adviser notes it's essential to understand that info and when it might be best to access your benefits.
-
Such Attractive Yields in High-Grade Munis Are Rare and May Not Last LongAccording to this munis expert, the last time munis were this cheap was a brief period in 2023. If you kicked yourself for missing out then, you have a second chance now.
-
Financial Analyst Sees a Bright Present for Municipal Bond InvestorsHigh-tax-bracket investors have an excellent opportunity to secure low-volatility, high-quality returns at yield levels rarely seen in over a decade.
-
I'm an Insurance Pro: How Not to Get Dumped by Your Insurance AgentYour insurance agent or broker might show you the door if you do any of these five things. Being a good customer is about more than paying your bill on time.
-
Two Estate Planning Issues You Should Never OverlookThis estate planning attorney explains why proper asset titling and beneficiary designations make a big difference when it's time to transfer your wealth.
