Most people think about divorce as something financially harmful. There’s logic to this since, in California, ending your marriage requires you to split your joint assets equally with your partner. That can be painful, especially if you’ve grown used to living in a two-income household.
However, divorces are far from being all bad. When handled correctly, many splits can actually lead to financial benefits for one or both spouses. Here’s how your divorce could help you financially prosper despite asset division.
1. Better Budgetary Control
Money issues are one of the leading causes of divorce nationwide. Many couples can’t agree on how to prioritize their spending, leading to arguments and ending marriages. That’s why the single biggest economic benefit of divorce is getting full control over your budget.
While your divorce may reduce your household income, you will be the only person with a say in how it’s spent. You’ll be able to prioritize the things that matter most to you while spending less on things you don’t care about.
For instance, your spouse might be someone who shops to relieve stress. That behavior can quickly rack up credit card bills without much to show for it. After your divorce is finalized, you won’t have to consider their impulse purchases when budgeting anymore.
Instead, you can funnel that money into retirement savings, investments, or anything else you prefer. When you’re only spending money on things you care about, you may be surprised how much further your income goes.
2. Penalty-Free Retirement Fund Withdrawal
Normally, you cannot withdraw funds from 401(k), an IRA, or other dedicated retirement accounts before you turn 59 and ½ without significant financial penalties. There is usually a 10% penalty attached to withdrawals by people below that age to discourage people from using their retirement accounts like normal investments. Divorces are the exception to this rule.
If you draft a qualified domestic relationships order (QDRO) during your split, you can make a one-time withdrawal from these accounts before the normal retirement date. You can withdraw the amount listed in your QDRO and use it for whatever purpose you choose.
There is only one downside to these withdrawals. Unless you roll the funds into a new retirement account, they will no longer be protected from income taxes. You’ll need to pay capital gains or income taxes on the profits the funds generate like you would for any other non-retirement investment. Still, if you need access to those funds now for expenses like new housing, this is an excellent way to do so.
3. Potentially Higher Social Security Benefits
Social Security remains an important source of retirement funds for many California residents. Married couples normally receive benefits based on the income of the higher-earning partner. This person gets a set amount of benefits depending on when they first request payments and their contributions to Social Security during their careers. Spouses can receive 50% of that amount but must wait until the other person requests benefits.
This is not the case for divorced couples. If you were married for at least ten years, you could request spousal benefits based on your ex-partner’s work history. You’ll still receive up to 50% of their amount, but you do not need to wait for them to request payments. Additionally, you can file as soon as you are eligible; their age does not matter.
You can request spousal Social Security benefits regardless of whether your ex has remarried. Your benefits will not affect their payments, so there is no downside. You’ll receive higher payments as long as your spouse’s benefits are more than twice what you would receive under your own work record.
4. Possible Tax Benefits
Couples filing jointly have different tax bracket thresholds than individuals. This is responsible for the so-called “marriage benefit,” where certain couples may wind up paying less in taxes when filing jointly than they would if they were single. However, the inverse is also true: in some cases, you could pay less in tax as a single person than you would while married.
Suppose your joint income was $300,000 annually. That would place you squarely in the 24% tax bracket. However, if you make $80,000 annually and your spouse makes $220,000, things will look different after your divorce. You will be in the 22% bracket, saving you significant money compared to your joint taxes. This effect grows the higher your combined income and the greater the gap in earnings between you and your spouse.
5. Better College Financial Aid for Children
If you have children, a divorce may benefit them financially, too. College is more expensive than ever, and paying for college can burden families who exceed the income threshold to receive federal student aid. When you end your marriage, you alter how the Free Application for Federal Student Aid (FAFSA) accounts for parental income.
When a child’s parents are married, the FAFSA requires both parents’ incomes to be considered when calculating aid eligibility. However, when parents are divorced, it only considers the custodial parent’s annual earnings. If parents share joint custody, the custodial parent is the one with whom the child lives more often.
Suppose you structure your custody agreement to allow your child to spend slightly more time with the lower-earning parent. In that case, they are significantly more likely to be eligible for financial aid. This could be the difference between serious student debt and few or no loans at all.
Make the Most of Divorce’s Financial Opportunities
Divorce is an excellent opportunity to reset your financial situation. However, it takes careful planning to maximize the benefits of your split. If you want to make the most of this opportunity, you will benefit from working with an experienced attorney like those at Kaspar & Lugay, LLP. Our knowledgeable attorneys understand how divorce can impact your finances. We are available to provide legal counsel and representation during your split. Learn more about how we can assist you by scheduling a consultation with our Marin County divorce law firm today.