How Retirement Funds Are Affected by Divorce Property Division
The financial implications of a New Jersey divorce can linger long after the emotional and practical issues have been resolved. For many couples, their retirement funds are some of their most significant assets in both size and importance (the average retirement savings of Americans ages 32 to 37 is $31,644). That’s why it’s important to understand how your retirement accounts will be impacted by a property division settlement during a divorce.
New Jersey Is an Equitable Distribution State
New Jersey divorce settlements are governed by the principle of equitable distribution, meaning that each partner is entitled to a fair, but not necessarily equal, share of marital property. Separate property is not included as part of the marital state to be divided in the divorce. There are specific guidelines for understanding what can be considered separate property. It may include some inheritances, gifts or property owned before the marriage.
When it comes to retirement funds, the amount that already existed in a pension, 401(k) or IRA before the marriage may be considered separate property. However, the growth and additional investments in the fund during the marriage is likely to be considered marital property eligible for division in the divorce settlement.
In determining whether an account is separate or marital property, the name on the account is essentially irrelevant. Each individual spouse’s account, or at least the amounts accumulated during the marriage, are generally eligible for property division.
Valuation of Retirement Accounts
To arrive at a settlement, it is important to understand the correct value of the retirement accounts in question. In general, premarital holdings can be subtracted from the marital share of these funds. Accounts like 401(k) plans, 403(b) plans and IRAs (Individual Retirement Accounts) are all eligible for property division in New Jersey, as are more traditional pension plans from an employer. Both defined contribution and defined benefit plans may be divided in the divorce.
In case of a defined benefit or pension plan, these are most commonly divided by offering a set percentage or amount of the monthly distribution after retirement to the other spouse. Of course, the partner with the pension will continue to work after the divorce, so it may be difficult to determine the proper valuation. A family law attorney could consult with a pension valuation adviser to determine a proper estimate of its value in the divorce settlement.
For defined contribution plans, it is easier to understand their current value minus premarital contributions. In general, both parties’ defined contribution plans should be added to the pot to determine the right distribution. If both spouses have roughly the same amount of money saved, it may be easier for each to walk away with their own accounts. If one spouse was relied upon to accumulate the retirement funds for both, however, a formal distribution will likely be necessary. In other cases, people may decide to “trade” their share in the retirement fund for another major asset, such as the family home, as part of their negotiations.
Avoiding Unnecessary Taxes, Penalties and Fees
In most cases, the divided proceeds of a retirement account can be rolled over into the other spouse’s 401(k) or IRA without accruing unwanted fees and penalties. However, for any type of plan covered under the Employee Retirement and Income Security Act (ERISA) — essentially, retirement plans offered in the workplace, whether pensions or 401(k)s — a Qualified Domestic Relations Order (QDRO) is necessary to effectuate the division.
An IRA can be divided by presenting a divorce decree, but these accounts require a QDRO from the family court in your divorce. This prevents either party from paying unnecessary tax penalties. Without a proper QDRO, the recipient spouse could lose up to 40% of the funds from the division. In addition, plan administrators will generally refuse to complete the distribution without the required order.
Property division can be one of the most important aspects of a New Jersey divorce, with long-running implications for both spouses’ financial futures. If you’re considering divorce, contact the experienced Cherry Hill family law attorneys at Morgenstern & Rochester at (856) 489-6200. With nearly 50 years of combined experience in family law, we can work with you to negotiate a fair settlement in your divorce and plan with you to protect your future.