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How to Divide Retirement Assets (Including 401k) in Divorce

Equitable division of property in a divorce can be a complicated procedure, especially when dealing with complex assets such as retirement accounts. Below, our seasoned Englewood complex asset divorce attorney discusses how retirement assets such as 401(k) plans can be divided in a New Jersey divorce.

Exchanging Retirement Assets for Other Assets

The most efficient way to divide retirement assets is to avoid dividing retirement assets. After you obtain an appropriate valuation of the asset, you can choose whether to divide the asset itself or instead exchange other marital assets of equal value. For example, one spouse might keep the entire 401(k) while the other is granted stocks and bonds equal to the value of their allotted share of the retirement account.

Moreover, if both parties have retirement accounts of roughly equal value, there is no need to go through the apportionment process. Everyone can keep their own accounts and wind up in an equivalent place financially. If, however, one party’s retirement account is substantially more valuable, and it is not feasible to replace that value with other assets, then dividing up the retirement account may be necessary.

Dividing 401(k)’s and Pension Plans

Splitting up a 401(k) or a pension plan requires a special type of court order known as a Qualified Domestic Relations Order (QDRO). Plan administrators are not allowed to issue funds from the plan to anyone other than the person named on the plan without a QDRO. The QDRO also allows distribution to the non-plan party without triggering tax consequences and early withdrawal penalties for the party that owns the account.

The QDRO will include an explanation of each spouse’s right to the funds as well as a valuation of the account. Valuation methods differ by state. Each party and their attorney may need to retain a financial expert to help value the account to inform the court’s opinion.

In addition to obtaining a QDRO, parties seeking to split a retirement account should be wary of the tax consequences. If, for example, the non-plan party has their share of the 401(k) placed directly into a rollover IRA, the receiving party can avoid paying taxes on the distribution until they get the funds in retirement. If they take their portion of the 401(k) as cash right now, they will owe taxes. Discuss your options with your attorney and accountant to maximize your benefit and minimize your tax penalties.

Dividing IRAs

Not all retirement accounts require a QDRO. IRAs do not require any special documentation in order to withdraw. Parties should still be wary of tax consequences and other penalties, however. As discussed above, if the recipient spouse sets up a rollover IRA for their portion of the paying spouse’s IRA, then no tax-triggering event will occur. The bank or other financial institution may still request a copy of the divorce judgment or settlement agreement to ensure that there was actually a divorce.

Advice and Representation for New Jersey Child Custody Matters

If you’re considering divorce in New Jersey or dealing with child support, child custody, property division, or other family law issues, contact the Englewood family law attorneys Herbert & Weiss at (201) 500-2151.