Financial planning after divorce usually starts with a number that's smaller than it used to be. The same income that covered one household now has to cover two, and most people aren't ready for how that feels on the first of the month. The good news is that the first year has a short list of decisions that matter most. Get those right and the rest of the plan tends to fall into place.
Key Takeaways
Your income is probably going to drop. Build the budget on what you need now, not what the household used to spend.
The house is usually the biggest expense in the first year. Your one income has to carry the load.
Money in a retirement account has a tax bill attached. Money in a checking account doesn't, so two balances that look the same may not be.
A divorce decree doesn't take your name off a joint debt. Only the lender can do that.
Rebuilding financially after divorce takes a plan, and a professional who has advised on it before can speed things up for you.
Your Finances After Divorce - Start With a Smaller Number
Most people come out of a divorce with less money coming in. Child support and alimony may help, but they don't usually replace a second paycheck, and they don't last forever. In Georgia, alimony is decided case by case, and the court looks at things like the length of the marriage, each person's earning ability, and how long it may take someone to get back into the workforce.¹
Budgeting after divorce usually means starting over, or close to it. Write down every source of income you'll have on your own, including support payments and any income from your investments. Then list what you spend, and don't skip the once-a-year items like property taxes, insurance premiums, and car repairs. Those are the ones that can blow up a budget in month seven.
A post divorce budget is usually the first real piece of financial planning after divorce, and it's easier to trust when someone else looks at it. A friend who's good with money, or a financial planner, can spot the line you forgot.
Should I Keep the House in a Divorce
This is the one question I get from both sides and there isn't a clean answer. It comes down to whether your income can carry the expenses. The mortgage, taxes, insurance, and upkeep don't shrink after a divorce. The income that pays for them often does.
Usually, one spouse buys out the other, by refinancing or by trading other assets. More times than not, I will suggest selling the house pre-divorce to have funds to split. We may suggest special stipulations in the divorce decree that allow capital gains to be spread to take advantage of the $250,000 exclusion per social security number on the deed.
If you're the one keeping it, get pre-qualified for a mortgage in your own name before the divorce is final. Finding out after the papers are signed that you can't refinance is a bad spot to be in.
If the house gets sold, timing matters for taxes. As I mentioned before, the IRS lets a single filer exclude up to $250,000 of gain on a home sale, and a married couple filing jointly up to $500,000, as long as the ownership and use tests are met.² Selling before or after the divorce can change which number applies. Your tax advisor can walk through the timing with you.
Make a List of Everything You Own After the Divorce
Before any of the other decisions can be made well, you need the full picture. A divorce asset worksheet is a plain list of every account and every piece of property, with what it's worth and whose name is on it. Retirement accounts, bank accounts, brokerage accounts, the house, vehicles, and anything else of value.
Pull a recent statement for each one. If you built this list before the divorce, now is the time to update it with what you ended up with. If you didn't, our divorce financial checklist covers what to gather.
Money After Divorce Is Worth Less Than It Looks on Paper
Two accounts with the same balance can be worth very different amounts once taxes come into it. Money in a traditional IRA or 401k hasn't been taxed yet. When you take it out, you'll owe income tax on it. Money in a checking account has already been taxed. So, $200,000 in an IRA and $200,000 in a savings account aren't an even trade, even though they look like one on paper.
Someone who kept the retirement accounts while the other spouse kept the house or the cash may have less than it looks like. Running the after-tax numbers is a core part of what a CDFA® practitioner does, and it's worth doing again after the divorce so your plan is built on real values. We covered the mechanics of splitting a 401k and an IRA in separate posts.
Financial Planning After Divorce Means Matching What You Own to What You'll Need
A house can be worth a lot on paper and almost nothing when the car breaks down. Part of financial planning after divorce is checking whether the assets you kept can pay for the life you're about to live.
Say one spouse keeps the house and most of the furniture, and the other keeps the brokerage account. On paper it's fair. Three years later child support ends, the mortgage payment doesn't, and there's plenty of equity but no cash. Selling is about the only way to get at it. That's a liquidity problem, and it's one of the easier ones to see coming if somebody runs the numbers early.
Divorce and Debt
A divorce decree can say your former spouse is responsible for the credit card. The credit card company didn't sign that decree. If both names are on the account, both people stay liable to the lender until the balance is paid or the lender agrees to release one of you, and the lender doesn't have to agree.³
Debt is the part of financial planning after divorce that people tend to put off, and it's often the part that follows you. Close or separate joint accounts as early as you can, and pull your own credit report a few months after the divorce to confirm nothing is still tied to you. If a joint debt has to stay open for a while, keep an eye on it. A missed payment by your ex can land on your credit too.
Pensions and Life After Divorce Financially
If a pension was part of your settlement, make sure the paperwork that moves the money got filed. A decree alone usually isn't enough. We wrote about what happens if a QDRO is never filed for exactly that reason.
Update the Paperwork That Points to Your Ex
Beneficiary forms don't read your divorce decree. A workplace retirement plan pays whoever is named on the form it has on file, even if that's a former spouse and even if the decree says otherwise.⁴ The IRS points out that a divorced participant may want to change the beneficiary and submit new forms to the plan.⁵ Update the beneficiary on every account, and revisit your will, powers of attorney, and health care directive while you're at it.
Rebuilding Finances After Divorce Is a Longer Game
How to survive after divorce is mostly a first year question. Building wealth after divorce is the next ten. Once the budget is steady and the house question is settled, the plan shifts to rebuilding. That could mean catching up on retirement savings, getting an emergency fund back to where it should be, or rethinking how your investments are set up now that the goal is yours alone.
Post divorce financial planning works best when it isn't done one piece at a time. The budget, the house, the taxes, and the retirement accounts all affect each other.
Working Through Life After Divorce With a CDFA® Practitioner
David Cross, CFP®, CPM®, CDFA®, CRPC®, established U.S. Asset Management in 2016 and brings 35 years of experience in financial services. As a CDFA® practitioner, he works with people rebuilding after divorce across Metro Atlanta and, virtually, nationwide. The focus stays on the financial side, since the legal work belongs with your attorney.
U.S. Asset Management, A Member of Advisory Services Network, LLC is a boutique investment advisory firm with two CDFA® practitioners on staff and while our typical has about $750.,000 with us, we have no pretentious asset minimums. Investments are custodied at a major national firm, and clients work with a fiduciary financial advisor.
Talk Through Post Divorce Financial Planning
Schedule a complimentary consultation with U.S. Asset Management. A conversation about divorce financial planning could cover your new budget, whether the house fits on one income, the after-tax value of what you kept, and what rebuilding could look like from here.
Frequently Asked Questions
What Does Financial Planning After Divorce Look Like in the First Year
Start with a budget built on the income you'll have, support payments included. Then work through the house, the debts, and what the accounts you kept are worth after taxes. For a lot of people, one or two of those decisions end up mattering more than everything else, and getting those right covers most of the recovery.
Should I Keep the House After Divorce
It depends on what else you'd be giving up to keep it. The house can look like the safe choice and still leave you with equity you can't spend and a payment that doesn't shrink when support ends. Run the numbers for the year after the divorce, with your income alone, before you decide.
Am I Still Responsible for Joint Debt in My Finances After Divorce
To the lender, yes. A divorce decree sets the terms between you and your former spouse. It doesn't change the account agreement with the bank, and the bank isn't required to release either of you.³
Is Alimony Taxable in Georgia
For divorce agreements signed after December 31, 2018, alimony isn't deductible by the person paying it and isn't counted as income by the person receiving it under federal rules.⁶ Older agreements may follow different rules. Your tax advisor can confirm which applies to you.
Footnotes
1 Official Code of Georgia Annotated § 19-6-5, "Factors in determining amount of alimony; effect of remarriage on obligations for alimony." https://law.justia.com/codes/georgia/title-19/chapter-6/article-1/section-19-6-5/
2 Internal Revenue Service. "Topic no. 701, Sale of your home." https://www.irs.gov/taxtopics/tc701
3 Office of the Comptroller of the Currency, HelpWithMyBank.gov. "Joint Account Liability." https://helpwithmybank.gov/help-topics/debt-credit-scores/debt-management/joint-account-liability/joint-account-liability-ex-not-paying.html
4 Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009). https://www.oyez.org/cases/2008/07-636
5 Internal Revenue Service. "Retirement topics - Divorce." https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-divorce
6 Internal Revenue Service. "Topic no. 452, Alimony and separate maintenance." https://www.irs.gov/taxtopics/tc452
Disclosures
CFP Board owns the marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the U.S.
Advisory services offered through U.S. Asset Management, a Member of Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this article are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.
Our firm does not offer tax or legal advice. Consult your tax or legal advisor regarding your situation.
This article was written by David Cross, CFP®, CPM®, CDFA®, CRPC®, Managing Director of U.S. Asset Management. David has spent 35 years helping individuals and families in Metro Atlanta and across the country work through major financial transitions. As a CDFA® practitioner, he has worked with clients through the financial side of divorce, including how retirement accounts are handled. The firm serves clients locally in Duluth and nationwide.
