Pensions, IRAs, 401Ks, and Other Retirement Benefits in New Jersey
When a marriage ends, and property must be divided among spouses, one of the things rarely considered is the distribution of retirement benefits. In New Jersey, you and your spouse can mutually agree on the division of your assets, including retirement benefits. If you can't agree, the court may divide the assets for you.
Equitable Distribution of Assets
In New Jersey, courts will equitably distribute marital assets. But "equitable" does not mean equal. Instead, the court will divide the property in a way that is fair to both of you. However, whether the division is "fair" is open to interpretation. The court will base this decision based on what you and your attorneys establish in court through evidence and the judge's interpretation.
To avoid having the decision left to the court, you and your spouse can agree on a financial settlement and decide how to split your marital assets together. After you come to an agreement, you can have the settlement finalized in court and included as part of your divorce. If you can't agree on a settlement, the court will do so for you using the principle of equitable division to award assets to each spouse.
Much like with the distribution of debts, some ex-spouses may be startled to find that the court will also equitably distribute retirement benefits as well. Even if only one spouse was working at the time, if earned benefits during the marriage, those benefits would become marital property. Marital property includes anything gained or earned during the marriage, and things like pensions, 401K accounts, IRAs, and other retirement benefits will be factored into an equitable distribution if they were earned during the marriage.
Retirement Benefits as Marital Property
In deciding how to split your property, the court will examine separate and marital property. Separate property typically includes:
- Assets each of you brought into the marriage,
- Inheritances, and
- Gifts, not including gifts between spouses.
All other assets acquired during your marriage and generally considered "marital property." The court will equitably split all marital property during a divorce. However, separate property can become marital property in some cases. If you use separate property, such as an inheritance or savings account you brought into the marriage, to purchase an asset or property jointly with your spouse, the purchased asset usually becomes marital property. However, the court may consider it separate property if you purchased an asset alone during your marriage, which was clearly the direct result of your income or efforts.
But separate property can also become marital property if:
- If the title of property titled in one spouse's name becomes jointly titled or transferred to the other spouse,
- The property increases in value during the marriage because of the efforts or assets of the other spouse, or
- One spouse clearly acts as if the separate property should be considered joint property or gifted to the other spouse.
For example, if you own a home before your marriage, but you and your spouse contribute funds to maintain the home during the marriage, it may become marital property.
Dividing Retirement Benefits
When it comes time to divide retirement benefits between spouses, the court will use the same method of equitable distribution that is used for the division of other property. Equitable distribution refers to the "fair," but not necessarily equal, distribution of property and benefits between the two spouses. When dealing with intangible assets, distribution can be somewhat difficult to measure. This is especially the case if the spouses are divorcing long before they intend on retiring. A common strategy employed by the court is to postpone the distribution of this particular benefit until it is matured and can be paid in whole to the other spouse. In some cases, another option is for the spouse who earned the benefit to keep the benefits, but, in turn, they must exchange an asset of equal value in order to retain ownership of the benefits.
If one of the spouses has a pension, it will still be divided among the two spouses upon divorce, so long as it was earned upon while the spouses were married. Regardless of what type of pension existed, it will still be split between the spouses through equitable distribution.
Dividing Different Types of Retirement Funds
There are two basic retirement plan types: contribution plans and defined benefit plans.
- Defined Contribution Plans Defined contribution plans have a defined balance from contributions to the plan by the owner. These plans include 401(k) and IRA plans. You can divide these retirement funds by rolling over a specified amount from one spouse to another tax-free. To do this, you must have an order from the court allowing the tax-deferred division of funds.
- Defined Benefit Plans A defined benefit plan pays out a specific amount upon retirement, such as 75% of your salary, based on your length of employment or age. Examples include pensions that pay a set monthly amount and military retirement pay. During a divorce, you can divide a defined benefit plan through deferred division. Once the benefit begins, you'll then divide the proceeds. The marital portion of the benefit plan is based on the "marital coverture fraction." The numerator is the total number of months of the marriage, and the denominator is the total number of months the plan has been in place. In some cases, once you reach a certain number of years in marriage, the court may consider the entire plan of marital property.
The division of retirement benefits normally occurs alongside or during the same phase as the division of marital property. Some spouses may not want to leave their retirement accounts up to equitable distribution through the court. Instead, spouses may opt to work out a settlement between one another to prevent a lengthy equitable distribution process. Settlements can simplify the lengthy divorce process and ensure that both spouses are able to express their needs for how property and debts should be divided.
Does Dividing Retirement Benefits Affect Support?
Decisions regarding pensions and other retirement benefits do not typically impact child support; however, they may have some impact on spousal support. Pensions do not count as income, but they are factored into a spouse's financial status when making determinations for child support or spousal support. Benefits will be considered differently for child support and spousal support, depending on the case.
Retirement Benefits and Spousal Support
In New Jersey, you may be able to have spousal support modified when you retire, whether it happens when planned or at an earlier time. The court will look at the retirement age and whether the retiring spouse had any control over the matter. For example, if you or your ex must retire early for health reasons, the retiring spouse may not have had much control over their retirement age. If one of you is retiring before full retirement age, the court will want to ensure they're doing so reasonably and in good faith.
When modifying spousal support, there's a rebuttable presumption that spousal support should end when the paying spouse retires. This means it's up to the non-paying spouse to show why spousal support should continue. The court will look at the following:
- The age and health of both spouses,
- The ages of the spouses when their marriage began and when the court issued the spousal support award,
- How much the receiving spouse relies economically on the spousal support,
- Whether the receiving spouse gave up other economic claims, including those upon retirement funds, in exchange for spousal support payments,
- How much alimony the paying spouse has already paid,
- All sources of income for both spouses, and
- Whether the receiving spouse can save for their retirement.
If a defined retirement plan begins paying both spouses upon one spouse's retirement, that may reinforce the argument to reduce or discontinue spousal support. That's why you must discuss the best method for splitting marital assets with attorney Joseph D. Lento and the skilled Family Law Team at the Lento Law Firm. Decisions you make about splitting retirement funds now may affect you decades later.
You Need an Experienced New Jersey Family Lawyer
Dividing retirement assets and benefits can become particularly complicated, especially if there are multiple retirement accounts to be factored into an equitable distribution. How you divide your retirement assets can also affect spousal and child support. If you're heading into a divorce, dividing assets can be an overwhelming and emotional challenge, but you don't have to handle it alone. Attorney Joseph D. Lento and the skilled Family Law Team at the Lento Law Firm can help. Contact them online, or give them a call at 888-535-3686 today.