Divorce and retirement accounts
Do You Have to Share Retirement Accounts in a Divorce?
The average American has at least $13,000 saved for retirement, so it’s worth considering this asset during divorce. Depending on your situation, you or your spouse might be able to keep part of each other’s retirement savings. Here’s what you need to know about how divorce affects retirement accounts.
Are Retirement Accounts Joint Property?
Whether or not a spouse can take part of a retirement account during a divorce will mostly depend on whether or not the retirement account counts as a joint property. Also called marital property, this refers to any assets you and your spouse must split in the divorce. In New Jersey, the definition of marital property is fairly simple. If an asset was acquired during the marriage, it’s marital property regardless of who actually paid for it or under whose name it is legally in.
This means that whether or not retirement accounts are part of a divorce settlement will depend on when the account was created and funded. If it was created after marriage, each spouse is entitled to a portion. If it was made before marriage, the other spouse is only entitled to a portion of the funds that were added after marriage. For example, if you had a $100,000 account that had $25,000 in it at the time of marriage, your spouse could only request a share of the $75,000 in funds added after marriage.
Keep in mind that there can be some exceptions to the general rule. One spouse probably isn’t entitled to the other’s retirement account in these situations:
- Your prenup specifically excludes retirement accounts from the marital property.
- The divorce agreement has been finalized, and you did not ask for part of the pension at the time of the divorce.
- You previously signed a waiver allowing another party to be listed as the beneficiary for the retirement account.
- All of the funds for the retirement account were added to the account before the marriage.
- You received the retirement account through a government or military organization that has its own rules for how its pensions work.
How Are Retirement Accounts Divided?
Keep in mind that New Jersey divorce laws don’t require you to divide all assets into two identical portions. Instead, all assets must be equitably divided. You’ll need to divide a retirement account in a way that seems fair and reasonable to the court. Some potential strategies for how to divide retirement funds in a divorce include:
- Each member of the couple getting half of the funds in each account
- One person getting back all the money that they added to the account
- Both spouses following the rules for division created by their plan administrator
- Each spouse keeping their own similarly sized account
- Each person getting a specified payment when the plan eventually matures
If you and your spouse can come to an agreement on your own, you can just present your decision to the court and have them finalize it. However, if you cannot agree during divorce mediation or other negotiations, you’ll need to let the court decide. In this situation, you and your divorce lawyer will explain to the judge why the retirement account ought to be split in a certain way, and the judge will decide what the fairest option is.
Calculating How Much a Retirement Account Is Worth
Actually figuring out how much of a retirement account to give up in a divorce can be somewhat challenging. Unlike a bank account, a retirement account doesn’t have a single fixed value. Its worth can grow over time depending on how much money you contribute and how much money you make. Depending on your divorce agreement, you might divide up the account based on its current value or based on its projected value at the time you retire.
This can make it challenging to determine exactly how much a retirement account is worth. Typically, couples will work with a professional financial advisor who can help them assess the value of a retirement account. Some of the many factors that go into deciding an account’s value during a divorce include:
- The current amount of money in the account
- How long you’ve been funding it
- Whether an employer matches any contributions
- The interest rate
- How long until you can take funds
- The tax implications of withdrawing funds
Using Retirement Accounts to Negotiate During a Divorce
Settling the question of who gets retirement accounts in a divorce can be a very valuable negotiating opportunity. When you are splitting your assets, you can use retirement accounts as a way to ensure that you get a satisfactory agreement. Try to be flexible and think of creative solutions that let everyone get what they want with as little fuss and paperwork as possible. Here are some of the ways that you might use a retirement account as leverage during negotiations:
- Your spouse signing over their right to your retirement account in exchange for you giving up your share in their business
- Each partner keeping their own retirement accounts to avoid extra paperwork
- Agreeing to keep your spouse as a pension beneficiary if they’ll give you the entire house
- Paying your spouse an extra share of marital savings so that you can avoid having to take funds from retirement
- Getting your spouse to keep paying your current car payment in exchange for part of your 401(k) in the future
What to Expect When Dividing a Retirement Account
Keep in mind that there is a lot of paperwork associated with dividing a retirement account. To move funds out of the account without incurring early withdrawal penalties, you might need help from your lawyer and financial advisor. When dividing a pension in a divorce or splitting a 401(k), following these steps could be helpful:
- Indicate how the retirement account will be split in the divorce decree.
- Have your divorce lawyer draft a qualified domestic relations order (QDRO).
- Show a draft of the QDRO to your retirement plan administrator to see if they will approve it.
- File the QDRO with the court for its approval.
- Submit the official, court-endorsed QDRO to your retirement plan administrator to start the transfer.
- Wait for the QDRO to be finalized so that each listed payee will be able to get payments from the retirement plan.
Ultimately, divorce can affect your retirement accounts in many different ways. Individual plans often have their own rules for how they must be divided, and splitting a retirement account can involve a lot of negotiations and paperwork. A talented divorce lawyer can make things as convenient as possible. The Law Offices of Kelly Berton Rocco have plenty of experience handling retirement accounts and pensions. Our team can help you figure out the best solution for your situation and arrange a satisfactory agreement. We serve customers throughout the Hackensack area and provide free consultations. Schedule yours by emailing us or by calling us at 201-343-0078.