Divorcing? 5 ways to keep your financial footing

The money moves you make during this crucial time can have long-lasting effects. These five tips can help you exit your marriage on solid financial ground.

1. Untangle financial affairs
2. Update your budget
3. Revisit retirement plans
4. Update your will and beneficiary designations
5. Review your taxes to see the effects of a divorce

1. Untangle financial affairs

During the marriage, each spouse should understand their overall financial situation. Untangling financial affairs can be complicated, especially if the two parties aren't parting amicably. Plus, the court might direct how the financial affairs are untangled, adding additional complexities.

During a divorce, pay special attention to these details:

• Titling of house or other joint property
• Account passwords
• Where to find your financial documents and accounts because they may be spread out across multiple institutions
• Details of your assets, including high-value items like jewelry or collectibles, debts, and future retirement benefits

Work with your attorney to gather any missing information.

2. Update your budget

Before you divorce, develop a plan for your post-marriage finances. Expenses often increase when individuals split combined insurance policies, cellphone plans and other household costs.

While a budget or spending plan might be hard to nail down at the start, take your best shot. Then, as you live under your new situation for a while and get a better grasp on expenses, take time to edit your budget to spend less than you earn and set aside money for your financial goals.

Update insurances

Part of this transition will be getting your own insurances. You might be going from having the auto and homeowners insurance in both your names to just yours.

You might even need to get new types of insurance. Let's say you're leaving your home and moving into a new apartment. You probably need to get a renters insurance policy, even if it's just for a short time while you figure things out.

Life insurance is also often a part of some divorce settlements, especially when children and child support are involved. Even if it's not part of the divorce settlement, the partner receiving child support or alimony might want to set up a life insurance policy on their ex-spouse. That way, if their ex dies, the life insurance policy can make up for the payments that won't continue.

Don't forget health insurance. If available, Consolidated Omnibus Budget Reconciliation Act, or COBRA, allows the spouse and dependent children to continue their existing health coverage for up to 36 months, but it might not be the most economical. Research all your health insurance options to make sure you have the coverage you need at the best price possible.

3. Revisit retirement plans

Everyone should consider the effects that a divorce has on retirement, even if it's decades away. Divorce can affect what happens to retirement funds collected during a marriage, no matter who earned the money. Retirement funds can be the biggest financial asset in a marriage, maybe even bigger than the home. If you feel like you're starting over, remember that it often doesn't take much to get restarted on your retirement journey.

Another way a divorce can affect your retirement is through your ability to contribute to tax-advantaged retirement plans. Let's say you earn $200,000 per year. In 2023 as I write this, you qualify to give up to the full limit of Roth IRA contributions if you file your taxes as “married filing jointly.” But, if you file as single or head of household going forward and earn that amount, you won't be able to contribute to a Roth IRA. You're above the limit.

You can find other considerations for a Traditional IRA that you should also review on the IRS website. If you have any questions on your ability to add to an IRA or other account, speak to a tax advisor and check the IRA contributions limit on the IRS website Opens in a New Window.‍ ‍ ^{See note 1}

Divorce can also affect military retirement payments, corporate pensions and Social Security retirement benefits. As you go through the divorce, select a lawyer who is familiar with the finer details of your situation.

VA Disability

Under federal law, VA disability benefits aren't considered to be marital property and can't be divided during a divorce. However, VA disability is treated as income for consideration in child support or alimony payments.

4. Update your will and beneficiary designations

Update your will to make sure your wishes are accurately reflected. Your retirement plan, life insurance policies and annuities will have beneficiary designations, and they might need to be changed. Maybe you don't want your ex-spouse to be the beneficiary of your hard-earned retirement funds. Also, if this topic is new to you or you need a refresher, start with this article that help you sort our your estate plans.

5. Review your taxes to see the effects of a divorce

It's important to realize that there will be changes. If you have questions or are unsure about your tax situation, speak with a qualified tax professional. For example, you may be now filing as single for head of household or losing dependents that you can claim. All these and more affect your taxes, which affects your financial situation.

You also might be doing the taxes for the first time in a long time. If your ex-spouse is the one who did the taxes each year, you might be in for a learning period. I suggest beginning with these financial housing tips during tax season. If it's been a really long time since you've done taxes, you might even start at the 4 steps for first-time filers.

In addition to these tips, think about the special considerations if you're going through a military divorce. Check out this article that directly deals with 9 questions to ask if you're going through a military divorce.