Call Us Today! (973) 447-3943

How Are Retirement Accounts Handled in Divorce?

By Sarah Jacobs, Esq.

Divorces can have far-reaching effects that may impact all areas of personal finance, and your retirement account is no exception. Whether you have a pension plan, a traditional IRA, or some other form of retirement account, it’s natural to be concerned about how your divorce settlement could affect an account you’ve built for your long-term future. 

Understanding the laws and terminology surrounding the division of assets in a New Jersey divorce can help. From equitable distribution to domestic relations orders and beyond, the knowledgeable attorneys at Jacobs Berger are here to help. 

Equitable distribution and New Jersey divorce settlements

NJ divorce law requires that property acquired during your marriage—called marital property—be divided according to equitable distribution

Under the equitable distribution model, marital property must be divided fairly, at least in the eyes of the court. However, equitable doesn’t always mean equal.  It’s possible, based on the circumstances, that one spouse could walk away from a divorce settlement with more assets than the other spouse received.

To determine which spouse should receive which assets in a divorce, the court considers many factors, such as: 

  • The length of the marriage
  • Which assets each person entered the marriage with 
  • Whether a prenuptial or postnuptial agreement is in effect, particularly as to how property should be distributed 
  • Each spouse’s physical and emotional health 
  • Each partner’s standard of living during the marriage 
  • Which financial contributions each spouse made during the marriage 
  • The earning potential and ordinary income of each person 
  • Whether one person made significant contributions to support the career or education of the other 
  • The necessity and financial impact of child support 

The court will also consider these factors when deciding how a pension plan, traditional IRA, or other retirement accounts should be addressed during the division of assets. The anticipated division of retirement assets would be that they are divided equally, but depending on the makeup of the retirement account, values can be offset against each other to make it more seamless.  Keep in mind that there may be inequitable distribution if there are: 

  • Premarital components
  • Gains/losses on said component
  • Post-compliant earnings
  • Gains/losses on post-complaint earnings
  • Survivor benefits that lower participant share of future benefits

How equitable distribution affects retirement accounts in a New Jersey divorce

There is no one way in which equitable distribution affects retirement accounts during NJ divorce proceedings. Why? Because every marriage and every family’s financial situation is unique. 

Still, the court is extremely likely to view retirement accounts opened after the marriage began as marital property. Accounts that predate your marriage are more likely to be considered separate property—but could still be subject to equitable distribution depending on the circumstances. 

For example, if one spouse added significant funds to a retirement account during your marriage, those funds could still be considered marital property—particularly if the account is a defined contribution plan. Not sure what your plans are? Language around defined contribution and defined benefits plans can be confusing. Here’s an overview of what each entails:

  • Defined contribution: A plan in which you and your employer contributed a specified amount (contribution) towards your plan. These plans can include 401(k) plans, 403(b) plans, employee stock ownership plans, or profit-sharing plans. There is no guaranteed amount provided upon payout. 
  • Defined benefits: A plan in which your employer provides a specified amount of money upon payout. Defined benefits plans include pensions and cash balance plans. 

Examples of other  circumstances the court could find noteworthy when determining equitable distribution of retirement accounts include: 

  • One spouse has foregone the opportunity to obtain their own employer retirement account to support the other’s career
  • One spouse made an early account withdrawal that predates the marriage to help fund the other’s education

With so much nuance involved, equitable distribution might mean that the sum total of funds in a couple’s respective retirement accounts will be split right down the middle and potentially offset against each other (potentially with the spouse having less getting an amount rolled over to equalize value) —or it could mean that each person keeps all of the money in their own retirement account. 

In most cases, the resolution lies somewhere between the two extremes. The best way to know for certain whether your retirement accounts are subject to equitable distribution is to discuss the matter with a seasoned divorce attorney and a trusted financial advisor. 

Additional factors to consider

Equitable distribution laws aren’t the only factors that affect the division and distribution of retirement funds. Retirement accounts are highly regulated, and most have strict rules regarding money withdrawal—and stifling early withdrawal penalties. 

Even when funds are removed at the designated time, many retirement accounts are subject to significant taxation. And which spouse is responsible for paying those taxes?

In addition, most companies that manage traditional IRAs, pension plans, or 401K retirement accounts will only release funds to the owner of the account. 

This all presents a unique complication when the court awards part or all of one spouse’s nest egg to the other in a New Jersey divorce. Enter the qualified domestic relations order (QDRO).

Qualified domestic relations order (QDRO) basics

A qualified domestic relations order is a court order that officially states that a portion of the funds in a retirement account—one that is IRS tax-qualified and covered by the Employee Retirement Income Security Act—should be paid to (or reserved for) the account owner’s former spouse. 

Note that qualified domestic relations orders don’t apply to military or government pensions, because they’re governed by different laws. Non-qualified plans may be split, but can require more complex negotiations because QDROs aren’t always accepted on non-ERISA plans. Moreover, even when they are, plan documents and administration require close review before drafting appropriate settlement language. 

Depending on the details of the retirement plan, funds appointed in a qualified domestic relations order could be released once the recipient turns a particular age. Whether the funds are released in monthly payments or in a lump sum is subject to the original retirement plan’s details. No matter the form of the payout, each spouse is responsible for their own share of taxes on the funds. 

The benefit of reaching a settlement 

It’s easy for discussions about money to become contentious during a divorce. However, a little bit of open-mindedness and collaboration can translate to a lot more control over the division of assets in a divorce, including retirement accounts. 

In a litigated divorce, equitable distribution can make the division of retirement accounts inflexible. Sometimes, the outcome is undesirable to not one but both spouses. By contrast, Alternative Dispute Resolution (ADR) isn’t subject to equitable distribution laws, so the division of assets can accommodate each person’s preferences and perceived value of individual marital assets. 

As you explore how to divide other assets, obligations, and debts, you may decide that certain assets—such as your home or vehicle—hold more or less value to you than retirement funds. ADR offers an opportunity for you and your soon-to-be ex to distribute the money in your retirement accounts in a manner that’s agreeable to both of you. 

Of course, ADR is dependent on a willingness to compromise and disclose all financial details honestly. If you and your spouse are unable to communicate in this spirit, litigated divorce could be the best option. 

Ultimately, the method and manner in which you and your spouse’s retirement accounts are distributed may be more efficient and e effective if you’re able to compromise and negotiate creatively based on the requirements of the plans 

Consult our Morristown retirement accounts attorneys about your NJ divorce today

At Jacobs Berger, we believe that future-focused, solution-oriented resolutions to the division of assets—including retirement accounts—can de-stress the divorce process for everyone involved. 

If you need help understanding the financial issues pertaining to your divorce, don’t wait— schedule your initial coordination call today with one of our experienced team members.

Contact Our Morristown Attorneys Today

At Jacobs Berger, our attorneys are experienced in protecting our clients across Madison, Randolph, Tewksbury, Morristown, and the greater Morris County area in all family law-related issues.

To schedule a strategic planning session with one of our experienced team members regarding your particular case, please contact us online or through our Morristown, NJ office at (973) 354-4506.