After you emerge from a divorce, you are taking the first step in a new journey as a single investor. The past is behind you, and now is the time to build a bright future for yourself that is backed by a growing retirement fund. While the process may seem long and arduous, focusing on one step at a time will keep you on track and moving towards self-sufficiency and a secure future. Here are a few tips on investment accounts, divorce, dividing mutual funds and more that can help make the process easier and less confusing during this time.
Keeping Your Credit at Its Best
Credit Freeze
Today, keeping an eye on your credit and investment accounts during divorce is easy with free credit checking apps that can alert you when your score is raised or lowered. An app can also alert you as to when a new account is opened in your name. While we would hope that people we once loved would be decent, some can be downright sneaky. A former spouse may attempt to open new accounts in your name. If successful, they can rack up debt and cause harm to your credit score. To prevent this from happening, you can “freeze your credit.” This prevents credit reporting agencies from releasing your credit report without your consent.
Keep Long-Term Accounts Open
Apps can’t tell you all the tips that will help you in a divorce situation. For example, removing your spouse’s name from a long-term investment account due to divorce, versus closing the account altogether, can strengthen your credit history. A strong credit history will be necessary when you buy or rent a home or purchase a new car.
Plan Out New Expenses vs. Current Income
Divorce can be expensive, and not just from lawyer fees. After divorce, you may now have to foot the entire bill for expenses like rent, utilities, groceries, and healthcare. On top of that, new costs of child support and alimony may come into play. You may need to adjust your spending habits immediately so that you can pay the bills and still continue to save money for retirement.
Update Your Paperwork
Many people, especially many married women, know what a pain it is to update everything in your life with a new legal name, like your social security card, driver’s license, passport, bank accounts, insurance information, and so much more. After divorce, it is important that your legal documents are updated to reflect your new status. Some of these documents include:
- Auto, health, and home insurance policies
- House and vehicle titles
- Emergency contact info
- Will
- Agent authorization agreements
- Health information sharing agreements
- Power of attorney documents
- Investment accounts
Divorce will change your tax filing status as well. The IRS looks at the final day of the previous tax year to determine your status. So, for example, if you were legally divorced on December 31, 2019, you cannot file as “married” for 2019. If you have children, taxes can become a problematic situation. The two parents will need to decide between themselves who will claim the children as dependents. Typically, the parent with whom the children reside most of the time will claim dependency, though this can vary widely with each situation.
Beneficiaries
Once you are legally divorced, you can designate anyone as the beneficiary for employment-sponsored plans. If you’re still married, federal law requires your spouse to be the beneficiary unless a written affidavit is provided.
Other beneficiary investment accounts you should update in divorce:
- IRAs and Roth IRAs
- Joint and individual accounts
- 529 plan accounts
- College savings plans
- Accounts for minors
- Savings and checking accounts
Investment Accounts and Divorce
Money that is invested during your marriage, and sometimes even before you were married, is claimable by both parties in a divorce, regardless of whose name is on the account. Depending on what state you live in, how and when you received the money will determine whether it is considered a community marital asset. For example, money that was deposited from income earned during the marriage will likely be considered community property. You can come to terms on investment accounts in divorce with a marital settlement agreement, or your state’s laws can determine how the investments will be split.
For large accounts, it may be necessary to get a temporary restraining order (TRO) to prevent the spouse from divesting the assets from the investment accounts during a divorce. This will freeze the account to prevent either party from closing or taking money from the account. A TRO can be obtained anytime before the divorce is final.
Dividing Mutual Funds in Divorce
When your account is invested into a mutual fund, dividing it in a divorce depends on whether the account is a regular investment or a retirement account. If the accounts are jointly owned, your mutual fund advisor or brokerage firm will likely be able to guide you on dividing the mutual fund investment accounts during divorce and creating new ones.
For funds that offer tax benefits, you will have to look at the lock-in period. Surrendering funds before the designated time, typically five years, means you will pay surrender fees. After that, you will get the money after the lock-in period is over. In a divorce, equity-linked savings investment accounts cannot be withdrawn from prior to the lock-in period. Ending your tax-savings investments early will cause a reversal of the tax deduction. It is advisable to work with a financial advisor to draw up an agreement to state the payment liabilities of each party and their share of the proceeds when dividing mutual funds in divorce.
Managing the Divorce Decree
It is important to know the terms of the decree and follow up to see that the assets are being divided accordingly. Making a list of the investment accounts and property in the divorce decree will help you keep track of things. Continue to monitor each account until the separation is complete. This includes qualified retirement plans from your spouse. An attorney can draft a Qualified Domestic Relations Order (QDRO) to complete this transaction.
Divorce is a complicated and lengthy process. For many, dividing mutual funds, investment accounts, and other aspects of divorce can be overwhelming, especially when combined with such a sensitive time in your life. Seeking the services of a financial advisor can take away the headache and let you rest easy at night.
Give us a call at ML&R Wealth Management today for a free consultation. Our team members know what you are going through and how to help.
