It can come as a surprise for divorcing couples in New Jersey to learn that their individual retirement accounts are subject to division in a divorce. Even though those accounts are typically in each individual’s name and are based on their years of employment, they are still considered to be part of the marital estate and thus subject to New Jersey’s equitable distribution laws.
What is equitable distribution?
New Jersey is an equitable distribution state, which means that marital property — assets that were acquired during the marriage — will be divided between the spouses in a fair and equitable manner. It does not necessarily mean that the division of the estate must be 50/50. While in many cases it is fair to divide the estate equally, the court has discretion to award one spouse as little as one-third of the estate and award the other spouse as much as two-thirds of the estate.
Division of retirement accounts via a qualified domestic relations order.
Splitting a 401(k) account or other qualified plan requires the preparation of a QDRO (qualified domestic relations order). This order allows for the division of qualified plan assets in a tax-deferred manner for the receiving spouse and provides that spouse with 60 days in which to roll it over into an IRA without penalty. If you want to take some money out for divorce expenses, you can make a one-time withdrawal before you do a rollover without incurring a 10% penalty, even if you are under age 59 1/2, but you will still have to pay income tax on that withdrawal.
While Social Security benefits are not subject to division in a divorce, there are some rules that will affect post-divorce income. For example, you cannot collect benefits on your ex-spouse’s record after a divorce unless the marriage lasted more than 10 years and you are over age 62. If your ex-spouse dies, you may be eligible for survivor benefits (100% of your ex’s benefits) provided the marriage lasted 10 years, you are at least 60, and you are not already entitled to benefits equal to or greater than your ex-spouse’s benefits.
If both spouses are already retired, you need to approach the division of retirement assets with care. There are several decisions to be made, such as how any loans against retirement accounts should be repaid, whether or not there will be survivor benefits for one ex-spouse if the other dies first, and more.
You can rely on Murphy & Cistaro to skillfully negotiate and mediate your issues to a satisfactory resolution. Should the need arise, you can also count on our experience for being aggressive litigators if the situation calls for a more assertive response. Contact us today for your free consultation.