How Retirement Accounts Are Divided in a Divorce
By the time that many people reach the age of 55, they have a retirement account with a balance of more than $100,000. Some retirement accounts may be far larger. This can present complicated issues during the divorce process as assets must be equitably divided between the two spouses.
Gray Divorces Will Have More Retirement Account Issues
Gray divorces, those that are between older couples are mainly about property division issues. They become even more complex as the divorcing couple nears retirement. Besides their home, much of their wealth is tied up in their retirement accounts. Since each spouse is understandably worried about how they will make it once they stop working, both parties are focused on getting what they can from the retirement accounts. If you are in this position, you will need a family law attorney to look out for your legal rights.
Retirement Accounts Are a Part of the Marital Estate
A family lawyer will tell you that retirement accounts are part of the marital estate. This was money that was earned during the marriage even if it cannot be accessed during the marriage. Therefore, this is something that would be divided between the two parties in the divorce agreement.
The calculation of what was earned during the marriage can be complex. Spouses can keep the money that they brought into the account before the marriage. It is only marital contributions that are subject to division. In addition, the appreciation of these assets during the marriage may also be an amount that is subject to division. Figuring out what is subject to division can get very complicated.
Note that retirement accounts are not just limited to what you may think. More than just an employer-sponsored 401(k) is subject to division. Defined benefit pension plans would also be subject to division in the event of a divorce. Even though the benefits may not be paid out now, a court order may specify how these payments are to be divided in the future.
The Laws of Equitable Division Affect the Retirement Accounts
New Jersey is an equitable distribution state. This means that there is not a presumption that the property is divided 50-50 in the event of divorce. The judge will look at several factors when deciding how to divide the accounts fairly. Often, this leads to a lack of predictability about what will happen if your case goes to court. Usually, the parties are better served by settling their disputes through negotiations without the need for a court hearing.
Some of the factors that a New Jersey court would consider in deciding how to apportion the retirement accounts include:
- The length of the marriage
- Each spouse’s own economic situation
- The spouse’s own contributions to the retirement accounts
- Each spouse’s age
- The standard of living during the marriage
How Much Did Each Spouse Contribute?
The contribution of each person to the retirement accounts is an important factor to be considered, but it is far from the only one. If one spouse has earned the bulk of the assets in the retirement account, he or she may argue to get a larger share of the account.
However, while the other spouse may not have physically earned the money in the retirement account, they certainly made their own contributions. When the divorcing couple raised a family, one spouse may have sacrificed their own career to spend time with the children. This would allow the spouse who earned the money to go to work every day and devote time to their career.
Contributions at Home Are Also Considered
Even if it is not monetary in value, tending to and raising the family is a contribution to the marriage, and it will absolutely be considered. The married couple was a team, and domestic contributions are valued by the court almost as much as financial achievement in the workplace. If someone has earned less than they otherwise would have because they sacrificed their own earning power, they will not be left out in the cold in retirement. The divorce attorney would help tell the story of why the client contributed less financially to the account than the other spouse. As a result, it is likely the accounts would be equally divided.
In addition, the family law system does not want someone to be impoverished in retirement while the other spouse lives a good life. Even if the court does not insist on absolute equality, it will not allow a great disparity between the two spouses. A judge will consider each spouse’s potential circumstances in retirement in deciding how to allocate the accounts.
Some of this would factor in the standard of living that the couple enjoyed during their marriage. The court does not want to take everything away from one spouse because the couple got divorced. Even though there may be some drop in that standard in retirement because of the divorce, a judge will look to preserve as much of that as possible.
What Each Spouse Can Earn Between Now and Retirement
Another factor that would be considered is each spouse’s ability to earn money between now and retirement. If there is a wide disparity in earning power between the two spouses, the court would consider that. One person may have a much greater ability to earn money and save between the time of divorce and retirement. For the spouse with less earning power, this will be the one opportunity that they have to secure their future. A judge may recognize that one spouse has an inherent advantage for the rest of their career which the other spouse does not have.
Each spouse should hire a divorce lawyer to look out for their own interests. This is one of the most important issues in a divorce. This is especially true when children are grown, and the couple has accumulated significant assets in their retirement accounts.
How the Actual Division Is Carried Out
These accounts are not simply divided. There must be a Qualified Domestic Relations Order (QDRO) to divide a 401(k) or pension plan between the two spouses. Then there are tax considerations each spouse much consider since these accounts may be tax-deferred. This is why each spouse can benefit from working with a family law attorney to figure out a strategy for dividing these accounts rather than trying to figure this out on their own.
The rules are different when dealing with an Individual Retirement Account that is not through an employer. In this case, it is much easier to simply divide the account. There is no QDRO necessary, although certain formalities have to be followed, and the decree that specifies how the account will be divided will need to be presented to the IRA’s custodian. If done correctly and the portion is transferred to either the recipient’s existing IRA or to a new one that is set up, there should not be any adverse tax consequences.
Work With a Family Lawyer
If you have questions about asset division, including your retirement accounts, contact the divorce attorneys at Lawrence Law at (908) 645-1000 today. We are standing by and are ready to help you.