Health Insurance: The Unexpected Cost
It’s a common scenario for one spouse to be covered under the other’s employer-sponsored health insurance plan. Post-divorce, the covered spouse may no longer be eligible for this benefit, leading to a sudden, potentially significant, expense.
Cobra continuation coverage can extend benefits from an ex-spouse’s employer’s plan for up to 36 months. However, this coverage can be costly, as you would bear the entire premium cost plus a 2% administration fee. Alternatives include seeking coverage through your own employer or the Health Insurance Marketplace. Yet, these routes may also involve increased out-of-pocket costs or changes to your health care providers.
Additionally, consider potential changes to life insurance policies and disability insurance. It’s essential to account for these potential changes early in your financial planning to minimize the financial impact.
Retirement Accounts: The Tax Trap
Dividing retirement accounts in a divorce can lead to substantial tax implications if not handled correctly. For instance, if funds are withdrawn from an individual retirement account (IRA) or a 401(k) without a Qualified Domestic Relations Order (QDRO), they may be subject to income taxes and a 10% early withdrawal penalty.
A QDRO is a court order that allows for the transfer of retirement funds from one spouse to the other without immediate tax implications. It’s critical to ensure that this document is in place and correctly executed to prevent unintended tax consequences.
Moreover, be mindful of the future tax implications of the retirement assets you retain. Traditional 401(k) and IRA funds will be taxed upon withdrawal, whereas Roth accounts have already had taxes paid. In a 50/50 split, these could be vastly different in value once taxes are considered.
Real Estate: Hidden Fees and Costs
Real estate is often the largest asset involved in a divorce. Transferring property ownership can carry substantial costs, including title search fees, escrow fees, notary fees, and recording fees. Moreover, if the spouse keeping the house cannot afford the mortgage on their own, they may need to refinance.
Refinancing a mortgage incurs costs, including appraisal fees, origination fees, and potential prepayment penalties on the existing mortgage. Additionally, the refinancing spouse must qualify for the new loan based on their income and credit, which can be more challenging post-divorce. Also, don’t overlook the capital gains tax implications if you decide to sell the property.
Property transfers and mortgage refinancing require careful financial planning and decision-making. Seek professional advice to understand the full range of potential costs.
Ask for Help
Divorce introduces numerous complexities to your financial life, some of which may not be immediately apparent. Understanding these hidden costs associated with health insurance, retirement accounts, and real estate can help you navigate this challenging period and lay the groundwork for financial stability.
Engage a financial professional and a legal professional with experience in divorce to ensure you make informed decisions that protect your financial future.
Disclosure: Independent Financial Group (IFG) does not give tax advice. IFG Registered Representatives (RR) do not give tax advice while acting as an RR. These matters should be discussed with your tax professional.
