After the divorce is final: the financial decisions that come next

During a divorce, the attorneys usually lead. They help negotiate the agreement, and much of the financial conversation centers on who receives what.

When the agreement is signed, a different kind of work begins. Several of our clients have come to us at that point, and what they needed first was rarely about investments. They needed a plan that fit a new life: often one income instead of two, expenses that were still changing, and questions about where to live, whether to change jobs, and how to provide for their children.

A settlement divides what a couple owned. It does not build a plan for what comes next.

What needs attention now

The first priority is making sure the financial steps in the agreement are completed.

Carrying out the agreement. Dividing a workplace plan such as a 401(k) generally requires a qualified domestic relations order, or QDRO, that the plan administrator accepts. IRAs are divided through a properly documented transfer under the divorce decree or a related written agreement.¹ A signed agreement does not move the money by itself. In my experience, much of the work after a divorce is making sure the financial instructions are carried out correctly, and keeping the attorney and CPA informed.

Beneficiary designations. Review retirement accounts, life insurance, annuities, and transfer-on-death accounts. State law may revoke some former-spouse designations, but federal rules can produce a different result for employer plans. Check the agreement with your attorney, then confirm each designation with the provider. Some agreements require certain designations to stay in place, such as life insurance that secures support.

Health coverage. If you were covered through your former spouse, contact the benefits office promptly about when coverage ends, any required notice, and deadlines for continuation or replacement coverage.

Cash flow. Build a working budget around the income you expect, any support you pay or receive, and current expenses. Expect it to change as housing, work, and the children’s schedules settle.

Accounts and debt. Separate joint accounts as the agreement directs, and confirm your responsibilities with each lender. Assigning a debt to one spouse does not, by itself, release the other borrower. Make sure you have access to accounts and credit in your own name.

Your tax professional. Let your CPA know about the settlement early. Filing status, withholding, and future taxes on the assets you received may all need attention.

Equal on paper is not always equal

Balances are easy to compare. How each account is taxed, and when the money can be used, is harder to see and matters just as much to the plan.

Consider a simple hypothetical. One spouse receives $300,000 in pretax 401(k) funds. The other receives $300,000 in cash. The balances match, but withdrawals from the 401(k) are generally subject to income tax. They do not represent the same amount available to spend.

A few other differences are worth knowing:

• Taxable investments may carry built-in gains. Two accounts with the same balance can produce different tax bills when sold.
• Home equity generally requires selling or borrowing to use, and the house keeps costing money. A qualifying homeowner can generally exclude up to $250,000 of gain on a sale, compared with up to $500,000 for qualifying joint filers. Divorce-related ownership and occupancy rules can affect eligibility, so check before setting a sale date.²
• Retirement withdrawals. A payment directly from a qualified employer plan to a former spouse under a QDRO is exempt from the 10% early-withdrawal tax, though income tax may still apply. After a rollover to an IRA, that exception no longer applies.³ If you may need some of that money soon, ask before moving it.

If you are still negotiating, your attorney and CPA can help you compare options after taxes.

What can wait

Once the immediate tasks and deadlines are handled, some larger decisions can be scheduled for later.

Whether to keep the house. If the agreement leaves that choice open, the home fits your new budget, and there is no sale or refinancing deadline, you can take time to decide. If it does not fit the budget, it is better to know early.

Major investment changes. Understand what you received, how it is taxed, and what you will need from it before reorganizing everything. A large holding in one company or a near-term need for cash deserves an early review.

Purchases and commitments that are not urgent. These can wait until your budget has been tested for a few months.

Waiting does not mean ignoring. Write down when you plan to come back to each decision.

What comes next

A few larger questions also deserve attention. They often overlap, but some shape the choices that follow

1. Taxes after divorce. If your divorce is final by December 31 and you have not remarried, you generally file as single or, if eligible, head of household. For agreements executed after December 31, 2018, alimony is generally neither deductible by the payer nor taxable to the recipient for federal purposes. If you have children, confirm who can claim child-related tax benefits and what paperwork is required.⁴
2. Insurance. Review disability and life insurance coverage and whether the amounts are still appropriate for your new situation.
3. Social Security. If your marriage lasted at least 10 years, you may qualify for benefits based on your former spouse’s record, generally at age 62 or older and while unmarried. Eligibility also depends on your own benefit and your former spouse’s eligibility. If your former spouse has not filed, you generally must have been divorced at least two years. Claiming does not reduce your former spouse’s benefit, and different rules apply if your former spouse has died.⁵
4. Your estate plan. Review your will, powers of attorney, and health care directive with your attorney. If you have minor children, discuss guardianship provisions and how money left to them would be managed.
5. Your retirement timeline. A plan built for a shared household may need a new savings target, a different retirement age, or both.

Building a plan for the life you have now

Even after the agreement is signed, several of these decisions tend to arrive at the same time, while daily life is still being rearranged.

When clients come to us after a divorce, the work is less about the portfolio and more about reframing the plan. The old plan reflected a shared household and shared goals. The new one has to account for expenses that are still taking shape, and sometimes a move, a new job, or a different schedule with the children.

I usually suggest starting with a plan that is good enough for the next six to twelve months, then revisiting it as the unknowns become known. Trying to settle every long-term question in the first few weeks often means deciding with numbers that are about to change.

If you are finishing a divorce or have recently finalized one, our team is glad to work alongside your attorney and CPA to help sort out what needs attention now, what can wait, and what comes next.

About the author

Andy Foldenauer, CFP, is a Senior Vice President - Financial Advisor and Senior Portfolio Manager with RBC Wealth Management in Richmond, Virginia. He and his team work with individuals and families through major life transitions, including retirement, the sale of a business, an inheritance, divorce and the loss of a spouse. To start a conversation, contact the team at (804) 225-1483 or andy.foldenauer@rbc.com.

Sources

1. Internal Revenue Service, Publication 504, Divorced or Separated Individuals (qualified domestic relations orders; transfers of IRAs incident to divorce). See also Internal Revenue Code §414(p) and §408(d)(6).
2. Internal Revenue Service, Publication 523, Selling Your Home; IRS Tax Topic 701, Sale of Your Home. See also Internal Revenue Code §121.
3. Internal Revenue Service, Retirement Topics: Exceptions to Tax on Early Distributions; IRS Tax Topic 558, Additional Tax on Early Distributions from Retirement Plans Other Than IRAs. See also Internal Revenue Code §72(t)(2)(C).
4. Internal Revenue Service, Publication 504, Divorced or Separated Individuals (filing status, alimony, child-related tax benefits); Publication 501, Dependents, Standard Deduction, and Filing Information; Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.
5. Social Security Administration, Benefits for Your Divorced Spouse, ssa.gov.