In a divorce, the marital home is often the most fought-over asset. However, the value of retirement funds often exceeds the value of the home shared with a spouse. There’s no one-size-fits-all solution to dividing up retirement savings, but it’s vital that you carefully consider your options regarding this aspect of your divorce.
Equitable Distribution of Retirement Funds
Under New Jersey law, retirement funds accumulated during your marriage are considered marital assets subject to equitable distribution. This includes the following:
- 401(k) savings plans
- 403(b) annuity plans
- Traditional and Roth IRAs
- Deferred income
- Other funds allocated for retirement
Note that equitable distribution does not necessarily mean property is split 50-50. Some of the factors used to determine division include:
- Duration of marriage
- Standard of living during the marriage
- Age and health of both spouses
- Current income and future earning potential of both spouses
- Contributions one spouse made to the other spouse’s earning potential
- Contributions one spouse made as a stay-at-home parent or homemaker
- Existence of a prenuptial agreement
Distribution of retirement funds should also involve a discussion of the right to retain survivor benefits in case the original account holder passes away before retirement.
Dividing Retirement Funds With a Qualified Domestic Relations Order
Retirement contributions made before a couple marries or after they file for divorce are not subject to equitable distribution. This can often mean that only a portion of a person’s 401(k) or pension must be divided during a New Jersey divorce.
A qualified domestic relations order (QDRO) is a legal document created to recognize an alternate payee for the assets within a retirement account. It is most often used to split retirement accounts considered marital property but can also be used to fund child support or alimony payments. It can be used on qualified retirement plans covered by the Employee Retirement Income Security Act (ERISA), which includes defined contribution and defined benefit plans. However, an IRA or pension provided through military or government employment can’t be divided with a QDRO.
To be valid, a QDRO must specify:
- The plan owner's name and mailing address
- The alternate payee's name and mailing address
- The percentage of funds going to the alternate payee
- How that percentage should be determined
- The number of payments included in the QDRO
- How the payments should be made
When you receive QDRO assets, you are allowed to:
- Withdraw the money
- Move the money into a plan that’s solely under your control
- Leave the money in your spouse's plan but retain the ability to invest your portion as you choose
We recommend that you speak to a financial advisor to find the solution that best fits your unique needs. Generally speaking, the older you are, the more cautious you must be in your retirement planning approach.
Dividing Retirement Funds with a Marital Settlement Agreement
Dividing assets with a marital settlement agreement (MSA) gives the spouse with higher retirement savings the flexibility of maintaining ownership of his or her retirement funds in exchange for accepting a smaller portion of other marital assets.
Although dividing assets with an MSA can be a good solution in some circumstances, extreme caution should be taken before trading interest in a spouse’s retirement account for the right to remain in the marital home. The future value of a home is uncertain, and ownership requires funds for maintenance, taxes, and improvements. As an investment, a diversified retirement fund is likely to be the safer choice—even if that means you must move to a smaller, more manageable property.
Making the Decision That’s Right for You
Dividing assets in a divorce is never easy, but it’s vital that you take the time to carefully consider all your options and seek the assistance of an attorney who can protect your rights. Making decisions based on instinct and emotion is a recipe for disaster when your future financial security is at stake.
At Carl Taylor Law, we believe divorce can be a new beginning for both spouses. To learn more about finding your “happily ever after” with divorce and family law attorneys Carl Taylor and Lisa Stein-Browning, call to schedule a private consultation.