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What’s Going to Happen to My 401(k) If I Divorce?

Man worried about assets

Retirement accounts are a prime concern for those eyeing a New Jersey divorce. As you may be aware, New Jersey is an “equitable distribution” state with regard to division of marital assets.

Per N.J.S.A. 2A: 34-23.1, “equitable” does not mean “equal.” It means the Court aims to divvy up marital possessions and accounts on the basis of what is most fair, given the unique underlying circumstances. A “marital asset” is one that was acquired or accrued during the course of marriage. A 401(k) retirement account is an asset often of top concern in New Jersey divorce cases.

What Exactly is a 401(k)?

As our Freehold, NJ divorce lawyers can explain, a 401(k) is a type of retirement savings plan that is offered by many U.S. employers and has numerous tax advantages to the recipient. Employees agree to pay a certain percentage of each paycheck directly into this investment account, and employers match all or part of that contribution. If contributions are made pre-tax, recipients will be taxed upon withdrawal, unless it’s a Roth account, in which contributions are taxed upon deposit. Rules for 401(k) withdrawal were relaxed under the CARES Act in 2020 for those impacted by the pandemic.

In a divorce, retirement funds acquired during the marriage are generally going to be seen as a marital asset that is subject to equitable distribution. So for instance, let’s say a woman starts her 401(k) prior to marriage, has $25,000 in it when they wed, and adds another $125,000 to it during the marriage. If the husband had no retirement account, he may be entitled to half of what was acquired during the marital coverture period, or $62,500. In other words, the husband would have a right to any retirement monies his wife accumulated during the course of the marriage. That assumes, of course, that all else is equal - and it rarely is.

Spouses are presumably entitled to a share of the other’s 401(k) contributions that have accumulated from the date of the marriage until the date of the divorce complaint filing. That is typically upheld as the cut-off for contributions subject to equitable distribution.

However, it should be noted that to collect on a 401(k), one would need to obtain a QDRO, or qualified domestic relations order. Such an order establishes or recognizes the existence of an “alternate payee’s” right to receive all or a portion of the benefits payable in a retirement plan. The mere fact that two parties reached a property settlement agreement in the dissolution of their marriage does not equal a domestic relations order. However, retirement plans aren’t permitted or required to follow the terms of a marriage settlement agreement unless they are QDROs.

If one spouse has substantially more assets or savings than the other, the Court may order the one with more to give a higher percentage to the other. None of this necessarily means you must liquidate your retirement accounts or other assets and hand it over to your ex. The exact outcome is going to be highly dependent on the individual facts of your case - and the skill of your divorce attorney.

Can I Assign My 401(k) Benefits To a Third Party Prior to Marriage?

Some clients have asked whether it is possible to assign retirement and/or savings account funds to a third person (such as a parent or sibling) prior to marriage to protect it, either in a divorce or in case something happens to them.

The answer is: Probably not, unless there is an enforceable prenuptial agreement that stipulates this. Because the fact is no matter what actions were taken prior to marriage, a spouse would have valid claims to certain assets.

A 401(k) account can’t be jointly titled because it belongs to an employee as an individual. However, a spouse or other third party could be named as a beneficiary. But that wouldn’t diminish a spouse’s claim to a share of the benefits amassed during the marriage.

A savings account might work a little differently, particularly if the third party (such as a parent, sibling, or best friend) was named as a joint co-owner of the account. But this is the sort of thing that should be discussed at length with your divorce lawyer before reaching any conclusions.

How Can I Avoid Losses?

When you’re equitably dividing your 401(k) and other assets, the main priority should be to minimize the amount of taxes and fees you’re going to pay, as this is likely to set your retirement back farther. Filing the proper paperwork that meticulously stipulates how assets are to be divided - and when - will be critical.

It’s possible you will be able to hang on to all of your retirement funds if your spouse has a comparable amount saved or if you’re able to offer other marital assets of comparable value.

Note that any withdrawal from a retirement account may incur substantial taxes, and if you do so before the age of 59.5, you may incur substantial penalties. Divorce agreements may indicate your spouse is responsible for paying these, but that is an element you’ll need to work out with your attorney first.

The best way to minimize your 401(k) losses and ensure a fair outcome is to work with a divorce lawyer with ample experience in family law matters involving complex division of assets.

To schedule a consultation with a member of our team, call us at (732) 810-0034 or visit us online.

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