Divorce can be a trying period in your life, but you’ll feel like life is a little closer to normal if you can regain your financial footing as quickly as possible. Read these tips to understand the impact on different areas of your finances after a divorce. In some cases, you may even discover a few perks depending on your situation or final divorce settlement.
1. You Can Access Retirement Funds Penalty-Free
If you receive a qualified relations domestic order as part of your divorce proceedings, you can take out an early withdrawal from your retirement account without being assessed for a penalty. Typically, you’d be charged a 10% fee on any distribution before the age of 59 ½. You will, however, be responsible for paying income taxes on anything you withdraw as part of your divorce. You can avoid taxes if you choose to roll your retirement funds into an IRA. Just be cautious not to jeopardize your financial future. Accessing retirement funds penalty-free can help improve credit if you’re trying to avoid debt or collections while going through a divorce.
2. Alimony Tax Laws Have Changed
If your divorce settlement is finalized post-2018, you’ll see some drastic changes in how alimony and child support are treated in terms of taxation. Pre-2019 agreements allow for alimony to be used as a tax deduction for the payer and counts as taxable income for the recipient. Under the new tax law, however, these rules are completely eliminated. There is no allowance for using alimony payments as a tax deduction and recipients do not have to include these payments as part of their taxable income. In short, this is a win if you’re on the receiving end, but could be a minor financial blow if you’re hoping to get a tax deduction for your upcoming divorce settlement.
3. College Financial Aid Goes Through the Custodial Parent
If your children are approaching college age, it’s important to understand how financial aid works when the parents are divorced. Rather than having to count both parents’ income on the Free Application for Federal Student Aid (FAFSA), only the custodial parent’s income must be included, which can potentially increase your child’s chance of receiving federal aid. Note, however, that child-support and alimony payments received from the non-custodial parents also have to be included as part of the FAFSA paperwork. If parents have a 50% custody agreement, the custodial parent is considered the one with whom the child stayed the most number of days in the preceding 12 months. With a bit of planning with your ex-spouse, you may be able to minimize your family’s financial responsibility by making the person with less income the custodial parent.
4. Joint Debt Can Be Assigned to One Person
You may feel happy that the judge assigns joint debt like a car loan or personal loan to your ex-spouse, but the situation has the potential to seriously damage your credit score. If your ex-spouse fails to make payments on the loan, whether on purpose or out of financial hardship, those missed payments will be reflected on your credit report. It can take up to seven years for a single late payment to naturally drop off your report unless you’re able to successfully initiate a credit dispute and get it removed before then.
5. Set Yourself Up for Credit Protection
In order to protect your credit score and financial future after divorce, check your credit report for any errors. You may want to sign up for credit monitoring services to track payments for accounts that still have your name on them. Additionally, remove your ex as an authorized user on all of your credit cards and any other lines of credit you may have. Look into refinancing joint loans so you can eventually separate your credit from your ex’s for good.
6. Hire a Pro to Expedite Credit Repair
If you’ve already experienced credit damage as a result of your divorce, consider hiring a professional credit repair firm to help get it back on track. Whether you’re feeling overwhelmed or simply want to move on to the next stage of your life, fixing your credit is a great first step to a clean slate. You can even sign up for a free consultation with Ovation to find out if you’re a good candidate for credit repair.
A divorce usually isn’t a walk in the park. But with a bit of background knowledge and some advance planning, you can minimize its financial impact and move on to brighter days.