Many couples these days invest significant amounts of money into stocks, dividends, and other financial products. But what happens during a divorce? In the case of high net worth divorces, spouses may have millions of dollars tied up in various investments. Most of the time, spouses want to wrap up their divorces and move on with their lives as quickly as possible. Unfortunately, these spouses may lose exorbitant amounts of money if they liquidate financial assets in a rushed manner. This issue becomes even more concerning when markets are extremely volatile.
Even when matters are relatively straightforward and the markets are positive, a divorce can be a massive source of financial uncertainty. Although this situation can certainly be challenging, there are a number of strategies couples can employ to overcome these hurdles and walk away with relatively few losses. With help from financial experts and attorneys who are experienced with high net worth divorces, spouses can move on with their lives without their financial stability crumbling beneath their feet.
Understanding Taxes and Fees
One of the biggest issues associated with dividing investments during a divorce is the possibility of paying huge taxes and fees. Generally speaking, taxable events are triggered whenever assets are liquidated during a divorce. These assets might be real estate properties, cars, jewelry, or financial investments. When spouses work with financial experts, it may become easier to avoid these fees and taxes when converting or liquidating investments.
For example, if one spouse chooses to cash out funds from their ex’s IRA, they would be hit with a 10% penalty in addition to taxes on those funds. However, spouses can cash out funds from a 401(k) or any other ERISA-governed group retirement plan without incurring that 10% penalty. Note that spouses must obtain a Qualified Domestic Relations Order (QDRO) to avoid this 10% penalty.
Once a spouse has cashed out these funds, they can minimize their taxes by converting the money back into a ROTH IRA when market values are low. This is especially effective during periods of market volatility. Doing this ensures that spouses pay taxes on lower values, and not on future growth or distributions. Spouses can also convert those funds from a ROTH IRA effectively when using the money for a home purchase or for education costs.
Understanding Risk Tolerance
Stock market risk tolerance is an important concept when dividing financial investments during a divorce. In many cases, one spouse may be incredibly knowledgeable about finances and investments, while the other spouse may be uninformed. Often, financially proficient spouses have very aggressive investment portfolios.
When these portfolios are divided during a divorce, an uninformed spouse may suddenly find themselves in the possession of investments that they cannot use effectively. In this situation, it is important for spouses to convert these investments and create a much more stable, conservative portfolio as soon as possible.
Timing is Everything
During market volatility, spouses must consider the timing of their divorce if they want to minimize losses. The date of the divorce finalization may have a considerable impact on a spouse’s financial well-being. With help from a financial expert, spouses can set a divorce finalization date that will minimize losses and help them avoid foreseeable market swings.