Over the decades, tales of the cost of divorce have become legendary. Johnny Carson, the longtime host of The Tonight Show, often drew humor from his pricey divorce settlement with ex-wife Joanna, leading husbands across America to conclude, “It’s cheaper to keep her.” But, as with most legends, there’s a kernel of truth buried beneath mounds of exaggeration.
In fact, many couples discover hidden financial advantages to a divorce, which leads some to divorce strategically to take advantage of those opportunities. So, in the interest of accuracy and balance in divorce discussions, here are some of the unexpected financial benefits you might derive from a divorce.
- Tax savings — For decades, affluent married couples have complained about the “marriage penalty” they pay because their combined incomes force them into a higher tax bracket. For decades Congress has promised to fix this inequity, but somehow they have gotten around to it. Since ex-spouses go back to filing taxes individually, divorce eliminates the marriage penalty.
- Financial autonomy — Finances are a leading cause of marital rancor, and not just if money is tight. Spouses often disagree about how their money should be allocated. So, whether you view your spouse as a spendthrift or a tightwad, divorce means you get to manage your money your way. You are in charge of how much you save, how much you invest, along with the risk tolerance of those investments, and how much you spend. If you were the sound money manager in your marriage, this autonomy could mean greater freedom over time to build greater wealth for a more secure retirement. You can also reset your lifestyle priorities. Divorce allows many individuals to downsize, so their monthly expenses are less, and they have more discretionary funds to pay down debt, invest, or spend as they would prefer.
- Early access to retirement savings — If an infusion of capital could help you pursue a business goal, eliminate debt, or otherwise improve your life, divorce can provide an early opportunity to tap your resources. Normally, you cannot access retirement savings from a 401(k) or IRA without a penalty until you are age 59 ½. That penalty, on top of the taxes you’d pay, makes it cost-prohibitive to withdraw funds. However, divorce is a qualifying life event that allows you to withdraw without penalty. When the court issues a qualified domestic relations order (QDRO) dividing the account between the parties, you can make a withdrawal from your portion. But, you’ll have to pay income tax on that amount, so bear that in mind.
- More financial aid for your kids’ college education — When students apply for financial aid, the Free Application for Federal Student Aid (FAFSA) requires parents to supply financial information. When the parents’ marriage is intact, both incomes count. But when parents are divorced, only the custodial parent has to state income. That income must include child support and alimony from the non-custodial parent, but that parent’s income is not reported. This can make a huge difference when the non-custodial parent is a significant earner.
- Social Security benefits — Two decades ago, the country began to see a rise in Gray Divorces. Empty nesters in unfulfilling marriages decided they did not want to spend their golden years with their spouses. This led many to discover there were hidden advantages in the Social Security system. Divorce allowed spouses who were married for at least 10 years and had reached age 62 to file for Social Security spousal benefits at retirement. If they had remained married, those spouses would have to have waited for their husband or wife to claim their own benefits. In some cases, that wouldn’t happen until the spouse reached 72. Perhaps the most appealing aspect of this benefit is that the spouse’s application for early Social Security does not affect the ex's monthly payment or that of his or her current spouse, if remarried.
- Medicaid eligibility for long-term care — The physical decline of old age is inevitable, and we have to plan for unpleasant possibilities, such as an extended illness and the need for long-term nursing care. Given costs of care, it’s easy for any senior to burn through their allotment of Medicare benefits and still need time in a skilled nursing facility. Fortunately, Medicaid will pay, but only if you have depleted your own resources. When you’re married, spending down means exhausting the couple’s joint assets. This penalizes the healthy spouse and takes much longer before the needy spouse becomes eligible. For this reason, divorced individuals are much better positioned for Medicaid planning.
Of course, couples must weigh these benefits against potential disadvantages, such as getting bumped off a spouse’s employee health insurance plan.
Singer Willie Nelson once quipped that “Divorces are so expensive because they’re worth it.” Certainly, that’s true for many couples who are caught in contentious, antagonistic, or empty relationships. But it’s also good to know that a strategic divorce can enable you to recoup some of that expense with these little-known financial benefits.