What to consider when dividing retirement accounts in divorce

On Behalf of | Feb 17, 2022 | Divorce

Couples going through a divorce in New Jersey probably know that they will need to divide their assets and possessions during the process. They may not understand how they will divide those assets though. Not all assets are the same and the actual division of the assets can be complicated. However, at the end of the divorce there has been an equitable division of the marital assets.

Dividing checking and savings accounts may be fairly straightforward as people have control over the money in those accounts and can take money out as they please. This is not true for a house or a car though. Those types of assets may have equity that will need to be divided, but people cannot simply take money out of a house to give to their spouse

Another type of asset that are unique to divide are retirement accounts. There are different types of retirement accounts and how each one is divided is a little bit different as well. People may have 401(k)s and other similar types of accounts; individual retirement accounts (IRA), both traditional and Roth; and others may have pensions.

How different types of retirement accounts are divided

While there are specific values in 401(k)s and IRA accounts, there are extra considerations that people need to make when dividing them. One is that there are tax penalties when people take early withdrawals from these accounts. So, if they want to remove a certain dollar amount and use it immediately those tax consequences need to be considered.

Another consideration is that money put into 401(k)s and traditional IRAs are pre-tax and will only be taxed upon withdrawal while money in a Roth IRA is post-tax and will not be taxed later on when it is withdrawn. So, the amounts in a Roth IRA and 401(k) are not exactly equal.

People do have the option of taking money from one retirement account and putting it directly into another retirement account though to avoid these tax consequences. They will need to have a separate order though called a Qualified Domestic Relations Order (QDRO) in order to do this.

Pensions are much different than the types of accounts above though as there is a monthly benefit as opposed to a specific dollar amount in the account. These will also need to be divided by a QDRO, but the division is a completed by a different method.

Asset division in a New Jersey divorce can be very complicated. Experienced attorneys understand the process though and may be able to guide one through it.