New Jersey property division: Dealing with retirement accounts

The manner in which retirement accounts are handled during divorces could impact people’s lifestyles during their golden years or delay retirement.

As married couples in New Jersey, and elsewhere, live and grow together, they often begin planning and saving for their retirement years. Should they divorce, however, they may have to alter their plans, and split their retirement accounts, which could have a significant impact on their futures. In a USA Today report, one expert estimates that it could cost 30 percent more for two people to retire individually, instead of as a couple. As such, it is important for people to understand how retirement accounts are handled during a divorce.

In the state of New Jersey, marital property is divided in accordance with the rule of equitable distribution. This means that a couple’s assets are split up based on what is fair and just, rather than into equal shares. Forbes.com points out, retirement plans, including 401Ks, pensions and IRAs, are considered marital property. As such, these accounts are generally subject marital asset distribution.

Beneficiary designations

Often, people list their spouses as the beneficiaries of their retirement accounts. Following a divorce, it is important for people to change these designations. Failing to take this action could result in a person’s former spouse unintentionally receiving benefits or funds. Under state law, beneficiary designations of divorced spouses on retirement, and other, accounts are generally terminated. It is not advisable, however, for people to rely on this and not complete the required forms to change their beneficiary designations.

Potential tax implications

As a part of their property settlement, people may choose, or be required, to transfer a portion of the interest in their retirement accounts to their spouses. According to a Fox Business report, it is important that this be done correctly for account holders to avoid being taxed. In general, these funds must be moved directly from one account into another as specified in the property settlement agreement or the divorce decree. The timing of these transfers is also important. People who are 59 and one-half-years-old may be subject to a 10 percent early withdrawal penalty if the funds are transferred before their divorce is finalized.

Qualified domestic relations orders

Qualified domestic relations orders, or QDROs, may reduce the likelihood of people facing tax consequences when dividing their retirement accounts during divorce. QDROs are decrees, judgments or orders that establish a person’s right to receive a designated percentage of their former spouse’s retirement plan, or a specific amount. Essentially, these court orders make a person’s ex a co-beneficiary on his or her existing qualified plans. As a result, the former spouse becomes responsible for the associated income taxes when the funds are paid out of the plan as annuities, pensions or withdrawals.

When people have IRA accounts, QDROs allow their ex-spouses to take control of their portion of the funds in the account. This lets them move the money into their own IRA accounts. QDROs also enable people to postpone paying the taxes until the funds are withdrawn.

Work with an attorney

The property division process is often complicated, and sometimes contentious, for New Jersey couples. Hurt feelings and poor communication can often hinder achieving amicable solutions that address people’s short and long-term needs. Therefore, people who are considering a divorce may benefit from obtaining legal representation. An attorney may explain their options, as well as look out for their interests throughout the process.