How can you prepare for a divorce? Financial planning is critical. We can help you make the transition and reestablish yourself financially.
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Divorce can be a difficult transition on many levels, not the least of which is financial. While no one likes to think this will happen to them, the unfortunate reality is that 40% to 50% of American marriages end in divorce. For anyone contemplating divorce, financial planning may help keep emotions from overriding good judgment.
Financial independence is important no matter what your relationship. This means establishing your own credit, ensuring you have the right accounts and investments, and preparing for your own retirement.
Schwab is here to help in the process of financial planning for a divorce so you can reestablish yourself for a more secure financial future. With a wide variety of investment options and a highly qualified team of Financial Consultants nationwide, we can provide comprehensive investment help and personalized guidance in a way that’s right for you.
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In a divorce, what happens to your IRA or 401(k) money depends on the settlement. Taking into account many factors, retirement plans such as 401(k)s, IRAs, and even pension plans may be divided or awarded to one party. Some factors that affect the settlement may include the dates when the accounts were established, state laws regarding separation and marital property, and any agreements dictating the terms for separation (such as a prenuptial agreement).
A Qualified Domestic Relations Order (or QDRO) is a court order to split a retirement plan or pension plan by recognizing joint marital ownership interests in the plan as part of a divorce or legal separation. A QDRO is often required to change or split a retirement plan and will contain information about a plan and how it will be changed or moved.
Financial planning is incredibly important during a separation or divorce. The first thing to do will be to create a budget that works toward your individual short-term and long-term goals. During the separation and divorce, your short-term goals may simply be to separate your finances while saving as much money as possible. You may need to close and reopen new personal bank, credit, and brokerage accounts, and you will certainly want to take inventory of your assets and debts to get an idea of where you stand. Decide on your long-term goals, and make sure to budget appropriately to achieve your goals.
Next, start building an emergency fund. A common rule is that you should have about three to six months of essential living expenses easily accessible in case of an emergency. However, if your divorce calls for a move or job change, you may want to save even more. Put the money into an easily accessible account like a savings account, money market account, or CD.
Finally, take time to review and rebalance your investment portfolio. Your financial separation may have changed your retirement trajectory, so make sure to reassess your goals against your situation. Visit with a Financial Consultant to find out where you stand, or use the Schwab Retirement Calculator to determine if you’re on target for retirement.
When emotions are running high, financial judgment can get clouded. To help make sure there’s a fair distribution of assets on both sides, consider taking the following steps before and after your divorce.
What should I do before the divorce?
If you haven't already, schedule a meeting with a divorce attorney to help with the process. Be prepared to discuss your financial situation, the disposition of marital assets, alimony, and child support. Don’t sign any documents without reviewing them with your attorney.
Take inventory of all shared and individually owned assets. Begin by gathering and organizing important documents, such as:
- Birth certificates, Social Security cards, and passports
- Bank, brokerage, and retirement account statements
- Life, health, auto, homeowner’s, and renter’s insurance policies
- Tax returns from the past five years
- Mortgage or home equity loan documents
- A list of outstanding bills or obligations
- Real property deeds and motor vehicle titles
- An inventory of household goods, personal belongings, and safe deposit boxes
List all income and expenses to see where you stand financially.
Close your joint checking and savings accounts. Check with your attorney and banker about taking out half of the money from a joint account and putting it in your own account. Ask your attorney about placing the assets from a closed account in an escrow account until your divorce settlement is complete.
Close joint credit cards and loans. As long as you maintain joint accounts, each of you will be 100% financially liable for debts incurred. If possible and with as much documentation as possible, close the accounts and minimize any risk to your personal credit during this emotional period.
Start thinking about how best to divide retirement account assets. Consult with your Financial Consultant, tax advisor, and attorney to discuss how you will divide pensions, retirement plans, company stock options, and other types of deferred compensation in your settlement. Also, consider the tax implications and long-range investment consequences of how you divide your assets.
The division of 401(k) and IRA assets may be accomplished as a tax-free transfer if spelled out in the divorce documents (generally, a divorce decree needs to be signed by a judge; sometimes the decree must be accompanied by a settlement agreement). The division of qualified plan assets will require a QDRO detailing the disbursement.
Freeze assets in all joint brokerage accounts. Immediately notify your investment consultant in writing that you are separated, and ask that no transactions be made without your approval. However, joint accounts typically grant both parties equal access, and a court order will be required to freeze or restrict accounts.
What should I do after the divorce is finalized?
If you are changing your name, take the necessary steps to do so on all documents, account(s), and possessions in your name. You may need a copy of your court order to request that agencies and creditors change your name in their records.
- Notify your employer, the Social Security Administration, and the Department of Motor Vehicles.
- Inform your bank, brokerage, and retirement firms. Order replacements for credit cards and other documents reflecting your name change.
- Update your life, health, auto, homeowner's, and renter's insurance policies.
- Request updated copies of real property deeds and mortgage or home equity loan documents.
- Make sure bills and utilities reflect your new name.
Review and update files for all personal accounts and property. Don't forget to review:
- Your will and estate plan.
- Beneficiaries for your IRAs, 401(k) plans, and life insurance policies.
- Your health and life insurance records, as needed.
- Your name on the titles of all property you own.
Request copies of your credit report to check for accuracy.
Consider your tax-filing choices. Have a tax professional assess whether you should file as "head of household." Update your W-4 (employer’s withholding allowance) forms as needed.
Update your investment strategy to fit your new life. Identify goals for the future, such as putting children through college and retiring comfortably.
Continue saving and investing for your retirement. Use the Schwab Retirement Calculator to determine if you’re on target for retirement.
Let us help you reestablish yourself as an individual.