Spouses can compound the complications of ending their marriage by engaging in reckless financial decisions. This divorce-financial-mistakes-self-destructive financial behavior should be avoided during divorce.
Ending a marriage divides the resources that were used to pay bills and purchase items. Impulsive purchases, such as a car or vacation, may help with celebrating the end of an unfortunate union but can lead to insurmountable debt when only one spouse is paying the bills.
Cashing in investments to cover expenses or debt is unwise. Selling highly-appreciated assets may lead to substantial tax liability. Assets that will no longer be invested cannot be used to meet financial goals.
Spouses who plan to pay spousal support cannot rely on a tax deduction when negotiating a settlement. The new tax law, taking effect in January, eliminates this deduction and its taxation as ordinary income for the recipient. Because the spouse who usually paid this support was in a higher tax bracket, this means higher taxes and less available money for their family.
But, quitting a job to escape spousal support is counter-productive. It can lead to more time in court and additional legal expenses. Not working also causes more financial suffering than paying support.
Using a 401(k) to pay for a new home or other new expenses can also have tax consequences. If taxes are not withheld, the IRS may impose an additional 10 percent for a spouse who is under 59½ years old.
Taking a portion of a former spouse's retirement accounts in accordance with a qualified domestic relations order in a lump sum payment may also lead to higher taxes. Instead, this should be placed into an IRA to continue to defer taxes.
The couple's house may also be deceptively attractive. At times, it may be beneficial for a spouse to keep it if they lived there for several years. But uncontrollable expenses can lead to a situation where a spouse is house rich and cash poor.
Developing a legal and financial plan can help overcome some of the difficulties associated with divorce. An attorney can help guide a spouse through this process.