Navigating health insurance, retirement accounts, and real estate
Divorce, while an emotionally taxing experience, also comes with several financial implications that, if not properly managed, could result in long-lasting financial strain. It’s essential to understand these hidden costs to effectively navigate your post-divorce financial life. Here are three key areas where hidden costs often lurk: Health insurance, dividing retirement accounts, and transferring real estate and mortgage refinancing.
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 For instance, if funds are withdrawn from an individual retirement account (IRA) or a 401(k) without a Qualified Domestic Relations Order (QDRO), they may be subject to income taxes and a 10%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 Traditional 401(k) and IRA funds will be taxed upon withdrawal, and if withdrawn prior to age 59 ½ may result in a 10% IRS penalty tax, whereas Roth accounts have already had taxes paid.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. Be sure to seek professional advice from your attorney and us, your financial advisor to help you 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.
Contact our office as we have the expertise in navigating the financial aspect of divorce to help you make informed decisions for your financial future.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This article was prepared by FMeX.
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