Your retirement savings may represent decades of work. So when you're getting divorced, one of the first financial questions you'll probably have is: "What happens to my retirement accounts?"
In New Jersey, pensions, 401(k)s, IRAs, and other retirement assets may be subject to equitable distribution. But that doesn't necessarily mean your spouse gets half of everything you've saved.
The first question is usually when the retirement assets were accumulated. Money or benefits earned during the marriage may be considered marital property and subject to equitable distribution.
But what if you already had $100,000 in your 401(k) or IRA before you got married? Well, that's a different story. A premarital portion may be treated differently, which is why old statements and financial records are extremely important.
Before agreeing to divide a retirement account, you need to determine what portion is actually marital.
No.
New Jersey follows equitable distribution, which means marital assets are divided equitably based on the circumstances of the case. That does not necessarily mean every individual asset gets divided exactly in half.
Retirement accounts also shouldn't be considered in isolation. Your home, investments, business interests, debts, and other assets may all be part of the overall financial settlement.
One of the biggest mistakes you can make is assuming every retirement account is divided the same way.
A pension can be particularly complicated because its value may depend on years of service, benefit formulas, retirement age, and other plan-specific factors. If part of the pension was earned before the marriage, determining the marital portion becomes especially important.
A 401(k) generally has an identifiable account balance, but there may still be questions involving premarital contributions, investment gains and losses, employer contributions, loans, and vesting.
IRAs can also contain both marital and premarital money. If you've had the same IRA since before your marriage, tracing the account history may be necessary to determine what portion may be separate property.
You've probably heard the term QDRO, or Qualified Domestic Relations Order. A QDRO is a court order used to divide certain qualified employer-sponsored retirement plans without simply withdrawing the money and creating unnecessary tax consequences.
But a QDRO isn't used for every type of retirement account. For example, an IRA is generally divided through a different process. The method matters because handling a retirement transfer incorrectly can potentially create taxes or penalties.
Sometimes retirement assets can be considered as part of a larger settlement. For example, one spouse may want to keep more of a retirement account while the other receives a greater share of another marital asset.
Whether that makes sense depends on the numbers. And remember that $100,000 in a retirement account isn't necessarily the same as $100,000 sitting in a bank account.
Taxes, accessibility, investment risk, and other factors may affect the real value of what each spouse is receiving.
Before agreeing to anything involving a pension, IRA, 401(k), or other retirement account, find out:
Retirement accounts can be some of the largest assets in a New Jersey divorce. Make sure you understand what you're giving up and what you're receiving before you sign your settlement.
I created my free Divorce Smarter Course to help you understand property division, retirement assets, alimony, custody, and the other major decisions you'll face in a New Jersey divorce.
Until next time,
Steve