Going through a divorce is an emotional roller coaster. This is true whether the divorce is amicable or contentious. Divorce is never easy. Although you may not be at your best during this process, it is important to keep in mind that the final divorce settlement will have a long-term impact on your finances.
A recent piece by Wealth Management discussed some of the more common impacts divorce can have on your finances. Three specific areas you can watch for include: retirement assets, QDROs and alimony and child support payments.
Retirement assets: Watch out for the tax man
In addition to making sure that you get a fair share of retirement assets in the divorce settlement, it is also important to take into account the tax implications. Not all retirement assets are taxed the same. Some are taxed before the assets are put into the account and others are taxed when the asset is paid out. As a result, it is important to know how your retirement accounts are treated so the amount taken into consideration during the property division negotiations is the final payout amount, not the estimated value.
QDROs: When you need one
Qualified Domestic Relations Orders (QDROs) are court orders that are designed to ensure someone other than the owner of the retirement account can receive payments. Certain retirement accounts require a QDRO in order for an ex to receive payments. In these situations, a divorce settlement agreement will not be enough for the financial institution to make these payments.
One example of an account that generally requires a QDRO is an ERISA plan.
Alimony and child support payments: Tax man strikes again
Negotiations regarding child support and alimony payments are another area to take consequences involving the Internal Revenue Service (IRS) into consideration before signing the dotted line on the final agreement. Alimony payments are impacted by taxes. In most cases, the person making these payments can deduct them from their taxes. Child support payments, however, are not deductible.