With tax season approaching and some people still struggling with the added expenses of the holidays, navigating the legal and financial implications of divorce can seem particularly overwhelming. But it's also not something you can ignore. In addition to following your attorney's advice, the following three steps can go a long way toward financially preparing for life after divorce.
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1. Understand how your state divides property
States fall into two categories when it comes to dividing property in the event of divorce. Most adhere to common law property rules. This states that assets acquired by one person during the marriage are owned solely by that person, unless the spouse's name is on the title, deed, or account.
For example, if you buy a car during your marriage and only your name is on the title, the car isn't considered marital property. But if you add your spouse's name to it, even if they never contributed a dime to the car's purchase, it's considered marital property.
Nine states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—follow community property law. This means that everything acquired during the marriage belongs equally to both spouses. Returning to our car example, even if only your name appears on the title, the car legally belongs to you and your spouse in a community property state. But a car you purchased before marriage would still be considered yours alone.
How your state handles marital assets doesn't just concern physical property like houses and cars. It also determines how much money you can keep in your bank and retirement accounts. Therefore, becoming well-versed in what your state considers yours and what it considers marital property will help you know what to expect when you begin dividing assets.
It's worth noting that if you had a prenuptial or postnuptial agreement, your state's typical property division rules may not apply. Consult your divorce attorney for advice on your specific situation.
2. Obtain summary plan descriptions for all retirement accounts
To properly divide your retirement accounts, you need to know how much you and your partner have saved and the account rules. Be prepared to provide details about your retirement account balances to your attorney and your spouse's attorney. You should also obtain summary plan descriptions (SPDs) for all your and your spouse's retirement accounts from the plan administrators.
These documents outline the plan's rules, including how the government taxes the money, details of any employer correspondence, and how to contact the plan administrator. This information is essential for determining an equitable distribution of pension funds acquired during the marriage.
If necessary, your attorney will help you legally transfer a portion of your retirement savings to your spouse. They can also help you prepare to receive the funds you're entitled to from your spouse's retirement accounts.
3. Create a new retirement plan
You also need to start thinking about how you'll save for retirement in the future. You and your attorney should be able to calculate the approximate balance of your retirement account after you leave the marriage. But you may not know how much you'll need to save to retire comfortably on your own.
Create a new retirement plan as soon as possible. Figure out how much you'll need to save each month and where you'll put it. If you're unable to save as much as you'd like, you may need to rethink your plan or find other ways to generate income in retirement.
Don't forget to update your retirement account beneficiaries as well. You probably don't want your ex-spouse to inherit these funds if you die, so name new heirs before you forget about them. If you have any questions, contact your account provider for details on how to update your beneficiaries.
Take one day at a time
Every divorce is a little different, but it's never easy. Take things one day at a time and seek advice from your attorney if you have questions about what will happen to your finances and retirement savings after the divorce.
Also, give yourself some time to adjust to your new life. If your new retirement savings strategy isn't working for you, feel free to tweak it until you find something that does.
