In a previous post, we discussed a couple of points about divorcing during a down or unstable market. The U.S. stock market continues to be a daily surprise — sometimes shock — to investors and businesses across the country. While there’s never a promise of financial gains in the stock market, there are times, such as now, during which anxiety about your financial security is heightened.
Divorce is a time when financial anxieties grow. When the stock market and economy go crazy, you might worry you’d be crazy to get divorced at that time. Economic fears are understandable, but you can get divorced during a tumultuous market and still come out with some financial security intact. You will just have to be even more careful and strategic during property division.
The current market reality makes financial education a divorce priority
Do you know for sure that a bulk of your family’s finances is tied up in the stock market? Ok, this means it is time to get technical. Sorry!
Know type of accounts and cost basis
If you are like many working couples, you have money saved in retirement accounts like an IRA and 401(K) and other money invested in the stock market. The non-retirement accounts are “non-qualified accounts.” The taxes related to these accounts are handled differently than taxes tied to qualified, retirement accounts.
When addressing non-qualified accounts and stocks, pay attention to cost basis. The cost basis of an individual security (stock) is the cost you and/or your spouse paid for it at the beginning. Let’s assume you both decide to split the value of the stocks. This might be a risky tactic. You want to look at more than the current value of your investments. You need to know which stocks have increased in value since you bought into them and which have decreased in value.
Sometimes Loss Is Your Gain
This might sound backwards, but the stocks that have decreased in value compared to their cost basis can be better for your finances in a divorce. Why? Because of taxation. If the government sees there’s been a financial loss, you aren’t taxed for that. If you only get the share of stocks that have increased in value, the taxes you pay in capital gains could result in a lower payout for you.
Don’t forget, this tax information pertains to non-retirement accounts. If you take money out of a retirement account before a certain time, you will pay tax penalties that could hurt your financial stability in the long run. A future post will delve into more details about divorce and retirement accounts.
Keep Calm and Invest On
It is very common within a marriage for there to be the spouse who has made most of the financial decisions and the spouse who was along for the ride. If you were the spouse who did not make investing decisions, you aren’t alone in not fully understanding how the market works. For many who get divorced, the marriage ends and, suddenly, they are left wondering how to manage a stock portfolio.
This new post-divorce reality can lead to anxiety. Worry about affording life after divorce, along with the felt ignorance when faced with the stock market, can result in a knee-jerk financial choice. Many with less experience running the finances will choose to simply cash out all the stocks they received through the division of assets. Making making the decision to cash out from an emotional and often uneducated place may provide some immediate relief; you might feel less anxious because you have added some padding to your bank account in an uncertain time. You may also have no desire to learn about the markets or investing.
A focus on the long-term, however, can be a growth opportunity after divorce, both in the metaphorical sense and in terms of your net worth. The financial markets can be your friend. That may be difficult to believe, particularly at times when stock market volatility is an everyday headline, but the facts are clear: the US stock market is one of the best investments you can make. History of the stock market has shown investing long-term is a strategic way to financially survive even a volatile market.
You aren’t a financial expert and you don’t have to be
When you decide to divorce, you aren’t signing up to become a financial expert. Just as you need a professional divorce lawyer to explain and walk you through the divorce process, there are professionals to help you reach a necessary, healthy understanding of your investment situation, too.
An experienced divorce attorney in your area will know the financial matters for you to address. Still, do not be afraid to voice your unique fears and questions about money and the economy to your family lawyer. Those fears are normal and can help your attorney know how to best move forward during property division.