Seven financial mistakes to avoid during divorce

Divorce forces financial decisions at the worst possible moment: while you are exhausted, while you are grieving, and while the person across the table knows things about your money that you may not. The mistakes below are not exotic. They are ordinary decisions that feel reasonable in the moment and cost real money for decades afterward.

None of this is legal advice, and none of it replaces your attorney. It is the financial half of the conversation — the half that often does not get its own meeting.

1. Treating two assets of equal value as equal

A $400,000 traditional 401(k) and $400,000 of cash are not the same asset. Every dollar that comes out of the traditional retirement account is taxed as ordinary income when it is withdrawn, and the account generally cannot be touched before age 59 1/2 without a 10% additional tax unless an exception applies. The cash has already been taxed.

The same problem shows up with a brokerage account. Two accounts can show the same balance while one holds decades of embedded capital gain and the other holds recently purchased positions. Whoever takes the low-basis account inherits the tax bill.

Ask for cost basis on every taxable account and the pre-tax versus Roth split on every retirement account before you agree to any division. Value the after-tax number, not the statement balance.

2. Splitting retirement accounts the wrong way

Employer plans — 401(k), 403(b), pensions — are divided using a qualified domestic relations order, a separate court order the plan administrator has to approve. The IRS defines a QDRO as a judgment, decree, or order that creates the right of an alternate payee to receive all or part of a participant's plan benefits, and it must contain specific information such as the amount or percentage awarded. A QDRO also cannot award a form of benefit the plan does not offer.

Two things go wrong here. First, a divorce decree that says a plan will be split is not itself a QDRO; if nobody drafts and qualifies the order, the division does not happen. Second, if the participant simply withdraws money and hands it over, the withdrawal is taxable to the participant. A distribution made to an alternate payee under a QDRO is one of the statutory exceptions to the 10% early distribution tax, but that exception only exists when the order is in place.

IRAs do not use QDROs. An IRA is divided as a transfer incident to divorce and should be moved as a direct trustee-to-trustee transfer into the receiving spouse's own IRA, so that no distribution is reported.

3. Assuming support payments are taxed the way they used to be

For divorce or separation instruments executed after December 31, 2018, alimony is not deductible by the person paying it and is not included in the income of the person receiving it. Older agreements executed on or before that date keep the old treatment unless they are modified and the modification expressly adopts the new rules.

This matters because it changes what a support number is actually worth. A dollar of post-2018 support is a full after-tax dollar to the recipient and a full after-tax cost to the payor. Negotiating from a pre-2019 mental model produces a number that is wrong for both sides.

Child support has never been taxable to the recipient or deductible by the payor.

4. Fighting to keep the house before running the numbers

The house is the asset with the most memory attached, which is exactly why it gets defended past the point of financial sense. Before you trade liquid assets for it, price the whole cost of ownership on one income: mortgage, property taxes, insurance (which in south Louisiana can move sharply year to year), maintenance, and any deferred repairs.

Then price the exit. Under the federal home sale exclusion you can generally exclude up to $250,000 of gain — $500,000 for a married couple filing jointly — if you owned and used the home as your main residence for at least two of the five years before the sale. Selling while still married can preserve the larger exclusion; selling years later as a single filer may not.

Also confirm whether refinancing is realistic. Keeping the house while your former spouse stays on the note leaves them liable and leaves you dependent on their cooperation.

5. Losing health coverage in the gap

Divorce or legal separation from a covered employee is a qualifying event under COBRA, and the maximum continuation period for a spouse in that situation is 36 months. But COBRA is expensive, and the notice deadlines are real: the covered employee or qualified beneficiary must notify the plan of a divorce or legal separation, generally within 60 days.

Decide coverage before the decree is final, not after. Compare COBRA against Marketplace coverage — loss of coverage through divorce also opens a special enrollment period — and against a spouse-of-record arrangement if one is negotiable.

6. Leaving beneficiary designations and titles unchanged

Beneficiary designations on retirement accounts and life insurance policies pass outside your will. A divorce decree does not automatically rewrite them for every account, and for ERISA-governed plans the plan document generally controls who gets paid. The result is a familiar and preventable outcome: a former spouse receives a 401(k) balance years later because a form was never updated.

• Retirement plans and IRAs — update beneficiaries once the divorce is final and the plan permits it.
• Life insurance — update owner and beneficiary, and confirm any policy required as security for support obligations is actually in force.
• Wills, powers of attorney, and health care directives — replace the ones that name a former spouse.
• Trusts, deeds, and vehicle titles — retitle what the settlement assigned to you.
• Payable-on-death and transfer-on-death designations at banks and brokerages.

7. Giving up a Social Security benefit you did not know you had

If your marriage lasted at least 10 years before the divorce became final, you are unmarried, and you are 62 or older, you may be entitled to benefits on your former spouse's record. The spousal benefit amount is generally one-half of the worker's primary insurance amount, and if you have been divorced at least two continuous years you can claim independently even if your former spouse has not filed.

Claiming on a former spouse's record does not reduce their benefit and does not require their cooperation. If you are close to the ten-year mark, the timing of the final judgment is a financial decision, not just a legal one.

The pattern underneath all seven

Each of these mistakes comes from the same place: making a decision about a number before knowing what the number actually is after taxes, after costs, and after time. Property transfers between spouses incident to divorce are generally not taxable events in themselves — but that only defers the question of who owes what later. Somebody eventually pays the tax. The settlement decides who.

If you are working through a settlement now, the useful next step is a side-by-side after-tax comparison of the proposals on the table. That is work we do alongside your attorney, and it is the part most people never see.