6 Tips for Managing Investments Through Divorce
Everyone hopes their marriage will be successful, but sometimes life just doesn’t go as planned. Regardless of the reasons behind it, a divorce can be financially devasting, especially for older couples who are close to—or already in—retirement. At any age, though, the financial fallout from divorce can leave spouses struggling to pick up the pieces.
Whether you’re currently working through a divorce or just want to be prepared, here are six tips that can help you better understand—and stay in control of—your investments.
1. Update Account Beneficiaries
If you don’t want your spouse to be the beneficiary on your investment accounts, contact your brokerage firm to remove your spouse’s name and designate one or more new beneficiaries. In many cases, a former spouse who is still listed as a beneficiary will receive the funds from those accounts upon your death. While some states have statutes that automatically revoke the beneficiary status of an ex-spouse, it’s best to address this yourself to avoid potential confusion later.
2. Get Access to Investment Accounts
In many families, spouses divide household tasks, including the responsibility for managing family finances. For example, one person might manage the accounts to make sure bills are paid and investment accounts are handled appropriately. If you aren’t this person in your relationship, take time to ensure that you have the needed information to access all your assets, including your investment accounts.
Ask yourself a few questions: Do I know about all investment, bank or other financial accounts that I might be entitled to? How is each account set up—in my name or my spouse’s name only, jointly held or some other way? Do I have the account numbers, login credentials, contact information and other necessary information to access these accounts? Am I able to make decisions in these accounts and place a hold on withdrawals if necessary? Having this information is beneficial even in a good marriage, but knowing where things stand is especially important should something go wrong.
3. Consider Whether to Keep or Sell Assets
Before you sell any assets, consider the tax consequences and other possible costs or penalties. In standard, taxable accounts, selling securities can trigger capital gains taxes. And some assets, such as annuities, can come with steep penalties if you exit the investment early. There's also the question of timing—if your divorce happens to take place during a market decline, that might not be the best time to sell. Another option is to keep your holdings and divide shares evenly between the spouses, which might mean you don’t have to worry about taxes or penalties until you decide later if you want to sell.
4. Decide How to Divide Taxable Investment Accounts
Splitting up assets between spouses will involve different processes, depending on the type of investment account. For taxable accounts, such as a brokerage account you own jointly with your spouse, you typically must notify the financial institution in writing to request that the joint account be closed and that new, separate accounts be opened in each person's name. The letter should detail how to allocate the investment assets between the two accounts. If one spouse is moving assets to an account with a new firm, keep in mind that some assets, such as proprietary investment funds or insurance products, might not be transferable, and liquidating such products may result in financial penalties, tax consequences and fees.
Your situation might call for immediate action if you're worried about actions your spouse might take regarding a joint brokerage account—investments or withdrawals you disagree with, for instance. You can contact your financial institution and ask whether the account can be frozen until you reach an agreement on how to divide your assets—or consult with a divorce attorney for guidance.
5. Evaluate Retirement Accounts
In most states, retirement account assets generally are considered marital property, which means your spouse might be entitled to a portion of these assets. Many couples include specific terms about what will happen to retirement account assets in their divorce or settlement agreements. Dividing up retirement assets can get a little complicated because different information is required and various rules apply depending on the type of account you have.
If you’re expecting a payout from your spouse’s 401(k), 403(b) or pension plan, you should talk to an attorney to learn whether you need a court order known as a Qualified Domestic Relations Order (QDRO). A QDRO recognizes that a spouse, former spouse or other dependent is entitled to receive a portion of the account owner’s retirement plan assets and is required in many states for a former spouse to receive any portion of the plan’s benefits. Individual retirement arrangement (IRA) plan assets typically don’t require a QDRO and are divided based on the terms of your divorce decree or separation agreement.
Keep in mind that how you divide an account might trigger taxes and fees. If you receive assets from your spouse’s retirement plan and want to cash out the assets by taking a distribution, you should consult with an investment or tax professional to determine what taxes or early distribution penalties might apply.
Also, when considering the amount you might receive from a retirement account in a divorce, remember that withdrawals from a traditional 401(k) account or IRA, where pre-tax contributions are made, will be taxed differently than those from a Roth account, where taxes are paid on contributions but generally not on withdrawals.
6. Enlist the Help of Professionals
Dividing financial assets during divorce can be overwhelming, so consider asking an attorney for guidance. Choose someone with the right experience to help with estate planning and other investment-related issues. Also consider working with an investment professional and an accountant to understand the tax implications of your decisions.
Before you select an investment professional, make sure the individual you’re considering working with is registered. FINRA BrokerCheck is a good place to start when researching professionals who sell securities, provide advice or both. This free tool provides an overview of an individual’s background and experience, as well as their firm’s history. It’s a good idea to also consult your state securities regulator.
Divorce is a significant event that can alter many parts of your life, including your financial responsibilities and goals. An investment professional can help you navigate and plan for your new financial future.
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