Divorce can be a complicated and emotionally charged process, and when retirement accounts are involved, it can become even more complex. Retirement accounts are often among the most significant assets that a couple has accumulated over the years. Here’s what you need to know about handling retirement accounts during a divorce.
Determine What Retirement Accounts You Have
The first step in handling retirement accounts during a divorce is to determine what accounts you and your spouse have individually and jointly. This may include 401(k)s, IRAs, pension plans, or other retirement accounts.
Understand the Different Types of Retirement Accounts
There are two major types of retirement accounts: defined benefit plans and defined contribution plans.
Defined benefit plans, such as pensions, provide a guaranteed payout during retirement, whereas defined contribution plans, such as 401(k)s, have a varying payout based on contributions, investment returns, and other factors. It’s important to understand the specifics of your retirement accounts, including any restrictions or limitations, during a divorce.
Understand State Laws Regarding Retirement Accounts
New Jersey is an “equitable distribution” state, meaning property is divided fairly but not necessarily equally.
Get a QDRO
A QDRO, or Qualified Domestic Relations Order, is a legal order that determines how retirement assets will be divided between divorcing spouses.
In the case of a divorce, a QDRO can help ensure that both spouses know the specific terms and conditions of the division of retirement assets. A QDRO should be drafted with the assistance of a qualified divorce lawyer or financial advisor. Once both parties have signed the QDRO, it must be filed with the court and then with the plan administrator.
Decide How to Divide Retirement Accounts
Once you understand what retirement accounts you have and the state laws that apply, you and your spouse must decide how to divide them. There are two primary ways to divide retirement accounts during a divorce:
- Transfer: One spouse may transfer a portion of their retirement account to the other spouse as part of the divorce settlement. This transfer must be done through a Qualified Domestic Relations Order (QDRO), which is a court order that allows the transfer of retirement assets without incurring tax penalties.
- Offset: Instead of transferring a portion of a retirement account, one spouse may agree to accept other assets of equal value as an offset. For example, one spouse may agree to give up a portion of their retirement account in exchange for keeping the marital home.
Seek Professional Help
Dividing retirement accounts during a divorce can be complicated, and seeking professional help is essential. A financial advisor or a divorce attorney can provide guidance on the best way to divide retirement accounts, taking into account tax implications and long-term financial planning.
An attorney can advise on any potential legal issues, including the division of military or government pensions. Rigden Lieberman, LLC can review the QDRO to ensure that it is properly drafted and complete and provide guidance on how to move forward should any issues arise after the divorce is finalized.
Update Account Information
After retirement accounts have been divided, it is essential to update the account information to reflect the new ownership. This includes updating beneficiary designations, contact information, and account registration.
Plan for the Future
Divorce can have a significant impact on retirement planning, and it is essential to plan for the future after the divorce is finalized. This may include adjusting retirement savings goals, revising investment strategies, and updating estate plans.
Handling retirement accounts during a divorce requires careful planning and consideration. It is crucial to understand the New Jersey laws that apply, decide how to divide retirement accounts fairly, seek professional help, and update account information after the division is finalized.
By following these steps, you can ensure that your retirement accounts are divided fairly and that you are well-positioned for a secure financial future after the divorce is finalized.