Divorce reshapes nearly every part of your financial life. Your income picture and tax situation changes. The retirement you planned together now has to be rebuilt for one. And the decisions you make in the months right after your divorce could have a lasting impact on your later years, especially if you’re 10 to 15 years from retirement.
The good news is that you have enough time to correct course, but only if you act with intention. Here’s what to focus on as you start rebuilding.
Start With an Honest Financial Snapshot
Before you can build a new plan, you need a clear picture of where you stand. That means looking at your income, your monthly expenses, and the assets and liabilities that came out of the settlement.
Pay particular attention to the after-tax value of what you received. A $500,000 traditional IRA and a $500,000 taxable brokerage account are not the same thing. The IRA carries an embedded tax liability on every dollar you eventually withdraw. If you didn’t account for this during the settlement, it’s worth understanding now so you can plan around it.
The same logic applies to the family home, if you kept it. Carrying costs such as a mortgage, taxes, insurance, and maintenance can strain a single income in ways that weren’t obvious when two incomes were covering them. Run the actual numbers before assuming that keeping the house is the right long-term move.
Understand What Happened to Your Retirement Accounts
Retirement accounts are often the largest marital asset outside of a home. How they were divided and whether the division was handled correctly has a meaningful impact on where you stand today.
If retirement accounts were divided as part of your settlement, that division likely required a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that instructs a retirement plan administrator to transfer a portion of one spouse’s account to the other without triggering early withdrawal penalties.
Details matter when establishing the QDRO. If the order doesn’t address what happens to market gains or losses during the period between the order being signed and the plan administrator completing the transfer, one party could absorb that market movement unfairly.
QDROS apply to pension plans as well as 401(k)s. If your ex-spouse had a defined benefit pension, the QDRO needs to specify not just the share you receive, but whether you retain survivor right benefits. Without survivor protections written into the order, you could lose your share of the pension if your ex-spouse dies before payments begin.
One more thing worth noting: If you received Roth assets in the division, treat them differently than traditional accounts in your planning. Roth funds have already been taxed, which means they’re generally more valuable dollar-for-dollar than a traditional IRA or 401(k) of the same size. Factor that into how you prioritize and draw from different accounts over time.
Know the Tax Traps
Divorce comes with several tax changes that can catch people off guard if they aren’t prepared.
The most immediate is your filing status. Once your divorce is final, you’ll file as single or as head of household if you have dependents in your care. For many people, this shift pushes more income into higher marginal tax brackets than they faced when filing jointly. That has real implications for how you structure retirement withdrawals, investment sales, and any additional income you generate.
If you and your spouse had capital loss carryovers from prior-year investment losses on your joint return, those carryovers don’t automatically follow you. Depending on how the settlement was structured, you may have received some, all, or none of them. Loss carryovers have long-term value because they can be used to offset future capital gains.
Pay attention to the cost basis of investment accounts received as part of the settlement. When you eventually sell, you’ll owe taxes on the gain from the original purchase price, not the value at the time of the transfer. Assets with a very low cost basis can carry a substantial embedded tax liability that isn’t visible on your account statement.
Rebuild Your Retirement Plan for One
If you’re still 10 to 15 years from retirement, you’re in a position where meaningful adjustments are still possible. This is the right moment to reassess your retirement picture and rebuild it from the ground up.
Start with what you have. Add up the retirement accounts you retained or received in the settlement, account for their tax treatment, and get a realistic number for where you stand. From there, look at your current savings capacity. What can you actually put away each year given your new income and expense structure?
Contribution limits for 401(k)s and IRAs are worth maximizing if you can. Once you reach age 50, catch-up contributions allow you to put away more than the standard limits. This is a meaningful advantage if you’re playing catch-up after dividing assets.
Your investment strategy may also need a reset. The risk tolerance, time horizon, and liquidity needs that made sense for a two-income household make look different now. Work through what an appropriate allocation looks like for your specific situation, rather than defaulting to whatever your portfolio looked like before.
Use Your Time Well
Rebuilding after divorce is a lot to manage, and not every decision has to be made immediately. What matters most in the early months is stabilizing your financial picture, correcting any structural problems from the settlement, and establishing a clear plan for moving forward.
If you’ve recently gone through a divorce and aren’t sure where your financial plan stands, we’re here to help:
- Talk with a Composition Wealth advisor. Our advisors work with clients navigating major financial transitions, including divorce. Conversations are confidential and focused on understanding your financial situation and goals. Click here to connect with one of our advisors today.
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Composition Wealth and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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