Difficult conversations and decisions can be an inevitable part of the divorce process. As these discussions unfold—particularly those surrounding division of assets and liabilities—it’s natural to feel concerned about the long-term implications of these conversations. One area of particular concern for many divorcing couples is how retirement assets will be divided, especially if retirement is closer rather than farther away for you.
Could your spouse be entitled to a portion of the nest egg you’ve been building? If so, how much of it? Alternately, what if you and your spouse had previously planned on a shared retirement and made financial decisions in your respective accounts based on the total picture—and now you’re left with less than anticipated in your accounts?
Navigating the negotiation process can feel less overwhelming when you understand the process and what to expect. Here is some information you need to know to help you move forward with more confidence toward your financial future.
New Jersey is an equitable distribution state
Your pension plan, 401k, or IRA—or at least a portion of them —could potentially be considered marital property. This is because, in New Jersey, marital property (at its most basic definition, those assets obtained during the marriage) is subject to division under equitable distribution.
Equitable distribution is the legal principle that marital property should be divided fairly. Note that “fair” and “equal” don’t necessarily mean the same thing. While some couples split retirement accounts, such as pension plans, straight down the middle, this may not be the most appropriate solution for you and your spouse.
What if I started contributing to my pension before getting married?
If you or your employer began contributing to your pension plan, 401k, or IRA before you got married, traditionally only the portion of the money accrued during your marriage, which is called the “marital portion,” will be considered for division during the divorce. The rest of the funds shouldn’t be affected by your divorce but (and isn’t there always a “but” when you’re talking about divorce?) there are circumstances where contributions made before the marriage or after divorce are on the table that can be considered divisible.
This is why it is very important to speak to a lawyer about the nuances of dividing retirement accounts.
Does my spouse have a right to my pension?
You’ve worked hard for your pension or other retirement assets. The idea of losing half of it, if not all of it, can be concerning. While this scenario isn’t impossible, you may be able to avoid it, particularly if your divorce case settles out of court.
Settlement through Alternative Dispute Resolution (ADR) can help you identify potential options to keep your retirement account, or portions of them, as it allows you and your spouse to develop a settlement agreement with both of your goals in mind. However, since the umbrella of equitable distribution includes more than just retirement accounts, and may affect other assets or liabilities, you may need to be creative.
How much of my pension is my spouse entitled to?
Under equitable distribution, many factors are considered when determining the value of a retirement account.
The amount of money your spouse is entitled to may vary based on:
- Your contributions to the account
- Employer contributions to the account
- The number of years you’ve worked for the company
- The length of your marriage
- Whether the plan is a defined contribution plan or a defined benefit plan, or is qualified or non-qualified
- The current value or vested portion of the account at the time of the divorce complaint
- How much time and money your spouse contributed to your career
- The value of other assets to be divided
Consulting with a family law attorney with experience navigating the division of assets, as well as financial experts, can help you make sure these calculations are done correctly.
How does the exchange of assets work in a settlement?
Like most family law matters, the division of assets varies from case to case. In negotiating a settlement, compromise may be a critical part of the process. You and your spouse should consider that the end result will include a give-and-take as to the ultimate many assets, debts, and obligations acquired throughout your marriage.
Ideally, there will be plenty of opportunity for you and your spouse to craft a mutually acceptable resolution. For example, your spouse may be willing to give up their stake in your pension plan or retirement account in exchange for some other benefit, such as keeping the house or larger alimony payments.
These agreements must be made in writing and signed to be made part of the official divorce judgment.
Will the pension plan administrator send money to my ex-spouse right away?
If your divorce settlement awards a portion of your pension or another retirement account to your spouse, a Qualified Domestic Relations Order (QDRO) may be necessary to direct the pension plan or other retirement account administrator to pay the correct share of the benefits to your spouse. Even with this order on file, though, a majority of plans will not pay benefits before the contributing spouse reaches retirement age.
In other words, your spouse may not see those payments for several years.
A few notes on QDROs to keep in mind, knowing that plan-specific requirements may affect these broad concepts:
- Non-qualified plans may be divided, but negotiations for them may be more complex. This is because QDROs aren’t uniformly accepted or implemented for non-ERISA plans.
- QDROs don’t apply to military or government pensions, as they fall under different regulations.
- Depending on the details of the plan, funds may be released in either a lump sum or as a monthly payment.
- No matter when and how a QDRO payout occurs, each party is generally responsible for their share of taxes on the portion of the benefits they receive.
Because they can be complex, it’s imperative that your plan documents are closely reviewed either before settlement language is drafted or in conjunction with drafting so that all options are considered and provided for, especially when a plan isn’t qualified. If the situation warrants it, you may consider working alongside an accountant, financial planner, and/or other retirement professionals at this time.
Questions about the division of assets and divorce? Jacobs Berger can help
We believe that with a forward-thinking, creative mindset, it’s possible to resolve the division of assets in a way that minimizes stress and supports your goals for your future.
Contact our team to coordinate your strategic planning session and explore options for your unique financial situation and goals.