published 19 June 2023
Understanding Hidden Costs of Divorce
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 maintaining two households will cost more than one, there are less well-known related costs as well. Consequently, understanding these hidden expenses can empower you to make more informed decisions and prepare for the financial impact of divorce.
Three Hidden Divorce Costs to Consider
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.
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, thereby leaving you with a higher financial burden.
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 maintaining premiums charged by your ex-spouse’s plan. While most plans do not allow employees to join or make changes to coverage outside of the annual open enrollment period, 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, and the preparation of this document by a QDRO specialist can cost over $1,000. Additionally, a separate QDRO is needed for each company plan, which could further escalate costs.
Dividing an IRA rather than a company 401(k) may prove to be a less expensive option. The Internal Revenue Code (IRC) stipulates that the distribution of an individual retirement account can be mandated in a divorce decree sanctioned by a family court.
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 conflicting interests regarding 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 instance, New York City’s rates range from 1% to 1.425%, plus additional rates for New York State. Hence, it is crucial to consult with a real estate attorney or tax professional to understand the applicable taxes in your area.
Furthermore, 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 arise.
In the current rising interest rate environment, mortgage payments will often be higher, increasing the overall cost of retaining the property.
Securing Your Financial Future
Divorce can pose numerous financial challenges, with many hidden costs that can catch individuals off guard. The potential expenses related to health insurance, retirement accounts, and real estate can accumulate quickly, creating a substantial financial burden if not anticipated and planned for properly. 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.
Disclaimer
This article presents the views of a contributing adviser and is not the editorial staff’s opinion. You can check adviser records with the SEC or with FINRA.
