Divorce can change some of your longstanding financial plans. You and your ex-spouse may have considerable money in your respective 401(k) accounts. You may be entitled to part of your ex-spouse’s 401(k) in a divorce. Conversely, they could also be due a part of your account. A lawyer can advise you on what to consider and how the accounts may be divided.
401(K) Accounts Are Part of Marital Property
Retirement accounts are generally considered part of marital property that is subject to division in the divorce. The couple would need to agree on the split of marital property. If they cannot reach a settlement agreement, the court will decide how the assets will be divided. Property issues must be settled before the divorce can be finalized.
You may think your spouse was responsible for putting away and saving the money in their retirement account. However, everything a spouse earns during the marriage is not necessarily their own. Any type of money earned during the union is considered marital property.
One major challenge is determining which part of the retirement account was earned during the marriage. The spouse may have had a retirement account before the marriage that they continued to fund afterward. You may need forensic accountants to help determine which part is subject to equitable distribution.
How New Jersey Courts Use the Principle of Equitable Distribution
New Jersey courts use the principle of equitable distribution to determine which spouse gets what part of the property. Equitable distribution does not necessarily mean the property is divided right down the middle. Instead, the court would use certain principles to arrive at what they consider fair. New Jersey law lists many factors that a court may consider, including but not limited to:
- The duration of the marriage.
- The income or property brought to the marriage by each party.
- The economic circumstances of each party at the time the property division becomes effective.
- The income and earning capacity of each party.
- The contribution of each party to the acquisition, dissipation, preservation, depreciation, or appreciation of the amount or value of the marital property.
- The tax consequences of the proposed distribution to each party.
A judge has discretion in what they would consider and how much they would weigh each factor. They could even take factors into account that are not listed in the statute. The result in your case could be highly unpredictable, and different judges could reach varying results.
The Actual Property Is Divided Using a QDRO
Once the division of retirement assets is determined, the property must be transferred according to a Qualified Domestic Relations Order to avoid tax penalties. The QDRO would order the money transfer to the spouse, instructing the plan administrator where the account is held. Without a QDRO, the obligation to pay income tax would be increased, and the spouse receiving the money would also have to pay an early distribution penalty.
When you are dividing retirement assets, always be aware that there are tax implications that affect your distribution. 401(k) accounts are tax-deferred, so you must pay income taxes on the income and capital gains in the account when you redeem the investment. In addition, you may also be subject to an early withdrawal penalty if a hardship exemption does not apply.
Contact Our Middlesex Divorce Lawyers at Wiley Lavender Maknoor, PC for Help With Marital Property Division
Our Middlesex divorce lawyers at Wiley Lavender Maknoor, PC can help you handle some of the most complex issues in divorce. Call us at 732-494-6099 or contact us online to schedule a free consultation. Located in Metuchen, New Jersey, we serve clients in Middlesex County, Monmouth County, Union County, and Somerset County.