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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
Dow Adds 516 Points on Broad Optimism: Stock Market TodayEasing trade war tensions and promise from early earnings reports has investors looking on the bright side to start the week.
-
Dave Ramsey Tells Us the Biggest Retirement Mistake You Can MakeThe talk-show host, author and podcaster tells Kiplinger what people can do to ensure a happy retirement.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.
-
I'm a Financial Planner: If You're Within 10 Years of Retiring, Do This TodayDon't want to run out of money in retirement? You need a retirement plan that accounts for income, market risk, taxes and more. Don't regret putting it off.
-
Five Keys to Retirement Happiness That Have Nothing to Do With MoneyConsider how your housing needs will change, what you'll do with your time, maintaining social connections and keeping mentally and physically fit.
-
Budget Hacks Won't Cut It: These Five Strategies From a Financial Planner Can Help Build Significant WealthCutting out your daily latte might make you feel virtuous, but tracking pennies won't pay off. Here are some strategies that can actually build wealth.
-
To Unwrap a Budget-Friendly Holiday, Consider These Smart Moves From a Financial ProfessionalYou can avoid a 'holiday hangover' of debt by setting a realistic budget, making a detailed list, considering alternative gifts, starting to save now and more.
-
Treat Home Equity Like Other Investments in Your Retirement Plan: Look at Its Track RecordHomeowners who are considering using home equity in their retirement plan can analyze it like they do their other investments. Here's how.
-
Why Does It Take Insurers So Darn Long to Pay Claims? An Insurance Expert ExplainsThe process of verification, investigation and cost assessment after a loss is complex and goes beyond simply cutting a check.
-
Two Reasons to Consider Deferred Compensation in the Wake of the OBBB, From a Financial PlannerDeferred compensation plans let you potentially lower your current taxes and help to keep you out of a higher tax bracket. It's important to consider the risks.
