What Happens to Retirement Funds in Divorce?

Divorce is a process that affects every aspect of your life, including your financial situation. If you are in or approaching retirement in New Jersey, it is important to educate yourself on how divorce will impact your benefits and income. Here is some helpful information about how retirement funds are normally split in a New Jersey divorce.

For more information, read our New Jersey Pre-Divorce Retirement Checklist and How To Protect Your 401k in a Divorce.

How Do You Divide Retirement Funds In A Divorce?

In New Jersey, the division of retirement funds in a divorce is typically governed by the principles of equitable distribution. Here are the key steps and considerations involved in dividing retirement funds during a divorce in NJ:

Identify Retirement Assets: The first step is to identify all retirement assets that are subject to division. This may include 401(k) plans, IRAs, pensions, and other retirement accounts. Even if an account is in one spouse’s name, it may still be subject to division if it was funded during the marriage.
Valuation: The next step is to determine the current value of these retirement assets. This can be a complex process and may require the assistance of financial experts or actuaries to accurately value pensions and other defined benefit plans.
Equitable Distribution: New Jersey follows the principle of equitable distribution, which means that marital property, including retirement assets, should be divided fairly but not necessarily equally. The court will consider various factors to determine what is fair, such as the length of the marriage, each spouse’s financial contributions, and their respective needs.
QDRO (Qualified Domestic Relations Order): If a retirement plan, such as a 401(k) or pension, needs to be divided, a QDRO may be necessary. A QDRO is a court order that instructs the plan administrator on how to divide the retirement account between the spouses. It is important to ensure that the QDRO complies with both federal and state laws.
Tax Implications: Different accounts carry different tax rules. For example, withdrawals from traditional IRAs and 401(k)s are taxable, while Roth accounts may not be. A tax professional can help minimize the impact.
Legal Assistance: It is highly recommended to consult with an experienced divorce attorney who can guide you through the process and ensure that your rights are protected. An attorney can help negotiate a fair division of retirement assets and assist in drafting the necessary legal documents.
Court Approval: Once an agreement is reached or a court order is issued, the division of retirement assets can proceed. The court will review and approve the division if it meets the equitable distribution standards.

It’s essential to keep in mind that divorce laws and procedures can change, so it’s a good idea to consult with a family law attorney who is familiar with the current laws and regulations in New Jersey. Additionally, consulting with financial professionals can help ensure that the division of retirement funds is done in a manner that aligns with your financial goals and needs.

What Are The Retirement Benefits For A Divorced Spouse?

In New Jersey, a divorced spouse may be eligible for certain retirement benefits under specific circumstances. These benefits typically depend on the length of the marriage, the divorce settlement, and the type of retirement benefits involved. Here are some key considerations:

Social Security Benefits: A divorced spouse may be eligible to receive Social Security benefits (up to 50% of their ex-spouse’s Social Security benefit amount) based on their ex-spouse’s earnings record if the following conditions are met:
- The marriage lasted at least 10 years.
- The divorced spouse is at least 62 years old.
- The divorced spouse is currently unmarried.
- The ex-spouse is eligible for Social Security benefits (either receiving them or eligible but not yet receiving them.)
- The benefit the divorced spouse would receive based on their own work history is less than what they would receive based on their ex-spouse’s work history.
Pension Benefits: The division of pension benefits in a divorce is typically governed by equitable distribution, as mentioned earlier. If the court awards a portion of the pension to the divorced spouse, they may be entitled to receive pension payments once the retired spouse begins receiving them. This would be outlined in the Qualified Domestic Relations Order (QDRO).
IRA and 401(k) Accounts: Similar to pensions, IRA and 401(k) accounts may be divided between spouses in a divorce using a QDRO. If awarded a portion, the divorced spouse can roll their share into an IRA account, which allows them to maintain tax-advantaged status for the funds.
Other Retirement Savings: Any other retirement savings or investment accounts that are divided as part of the divorce settlement may become part of the divorced spouse’s assets. They can manage and access these accounts according to the terms of the settlement.

The specific benefits a divorced spouse receives will vary depending on the individual circumstances of the divorce, the length of the marriage, and the decisions made during the divorce settlement negotiations or court proceedings.

Why Work with a Financial Advisor During Divorce?

Divorce is not just a legal process—it’s also a major financial transition. Working with a fiduciary financial advisor can make the difference between a secure retirement and one filled with uncertainty. A financial advisor can:

Evaluate Settlement Options: Show you how different divisions of assets will affect your retirement income.
Plan for Taxes: Help you minimize the tax consequences of splitting retirement accounts.
Adjust Your Retirement Strategy: Update your investment and withdrawal plans to reflect your new financial reality.
Protect Your Savings: Ensure you don’t lose retirement value through avoidable mistakes.
Build Confidence for the Future: Give you a clear plan for living comfortably in retirement, even after divorce.

At Zynergy Retirement Planning, we specialize in helping individuals in New Jersey navigate the financial challenges of divorce during retirement. Our team acts as a fiduciary, meaning your best interests always come first.

Taking the Next Step

If you are approaching or already in retirement and facing divorce in New Jersey, the decisions you make today will have long-lasting effects. Understanding the rules around asset division, benefits, and tax implications is critical. With the guidance of a skilled attorney and a fiduciary financial advisor, you can protect your savings, safeguard your income, and move forward with confidence.

Contact Zynergy Retirement Planning today to learn how we can help you through this transition and set you on the path toward long-term financial stability.