How Retirement Plans Are Treated in a New Jersey Divorce

Under New Jersey law, all marital assets and debts will be divided in a way that is “equitable” (i.e., “fair”.)

Retirement plans are subject to division through equitable distribution, just as any other marital asset would be.

The portion of a retirement account that will be shared is the part that was accumulated by either of the parties during the marriage.

“During the marriage” means between the date of marriage and the day that the divorce complaint was stamped “FILED” by a clerk in the basement of the courthouse (why? That’s for another day…)

Will the Court automatically award your spouse 50% of the amount that accrued “during the marriage?”

Well, the word “equitable” may mean different things to different divorce court judges, but in my experience, judges almost always determine “equitable” to be “equal” when it comes to retirement accounts.

So how is the division of a retirement account done?

Step one is to determine how much of the plan is marital property, and thus subject to distribution.

What I mean is that depending on the circumstances, all or only a portion of a retirement plan could be considered separate property.

The clearest example is if the entire retirement was earned prior to the marriage, then it would be considered separate property.

Therefore, none of it would be subject to distribution.

But in many circumstances, some portion of the plan is marital while another part of the plan is exempt as premarital.

In those cases, the plan will have to be valued if the parties want the owner of the plan to "buy out" the other party's interest.

This is easier for some accounts than others.

A 401(k) for example is usually easy to value; simply look at the balance on the date that the complaint for divorce was filed. Then an adjustment is usually required for all passive gains or losses that have occurred since the date of filing. 

Non-vested pensions and other types of retirement accounts are more difficult to value.

In more complicated situations valuation usually require hiring an expert, like an actuary, to analyze the numbers and come up with a value.

But if the parties are not looking for one to buy out the other's interest in the retirement plan, then we can actually cut the plan into two separate plans, one for each party, in accordance with his or her interest in the plan.

This is done using a Qualified Domestic Relations Order (ie, a "QDRO", pronounced "quadro.")

Whether we are doing a buyout and thus we need a valuation, or we are carving out two separate plans and thus we need a QDRO, I like to use Troyan, Inc. out of Sarasota Florida. Their fees are reasonable (often $500), they really know what they are doing, and they are a pleasure to work with.

The final step is distributing the retirement account.

This is because there are rules that must be followed so that you can avoid being taxed when you divide the account.

Many retirement plans require the use of a Qualified Domestic Relations Order or other similar vehicle to divide the plan without experiencing a tax penalty.

There are unique rules for each retirement plan.

Troyan (or whatever expert the attorneys in your case choose to use) will make sure that you and your spouse are dividing your retirement plan without triggering a taxable event.

To sum up, dividing a retirement account can be done through a QDRO which allows you to divide the asset without incurring taxes right away.

As an added bonus, once you do begin taking out money from these accounts during retirement, you will likely be in a lower tax bracket than when the accounts were divided and may end up paying less taxes over time.