Can My Spouse Claim My Retirement Assets during Divorce?

Divorce brings up all kinds of tough financial questions. One of the most common is whether your spouse can claim your retirement assets. 

The short answer? Yes, this is a possibility, but how much and what gets divided depends on various factors, especially in a state that follows the principles of equitable distribution, like New Jersey.

While working with an experienced divorce attorney and financial professionals is the best route to ensuring your assets are protected, understanding the factors behind dividing retirement accounts can give you valuable knowledge during these complex discussions.

Understanding retirement assets in divorce

Let’s start with some basics. For many married couples, retirement accounts comprise a significant portion of their financial portfolio. According to the Pew Research Center, for households where at least one person has a retirement account, these funds make up 27% of their median net worth. 

However, when couples divorce in New Jersey, assets—including retirement assets—are divided by equitable distribution. 

Unlike community property states, where assets are split 50/50, New Jersey’s equitable distribution law divides all marital property based on what’s fair rather than precisely equal. 

Marital vs. separate property: what they mean for your retirement accounts

When dividing retirement assets, one of the most critical distinctions is whether those funds are considered “marital” or “separate” property:

• Marital property includes any assets acquired or contributed to during the marriage. 
• Separate property is anything you owned or contributed to before the marriage. 

When it comes to retirement assets, they could be either marital or separate property depending on the type of account, when they were established, the length of the marriage, whether there was a prenuptial agreement, and numerous other factors. 

Types of retirement accounts subject to division

Not all retirement accounts are treated equally during divorce. Some accounts may be subject to division, while others remain off-limits to your spouse. For example:

• 401(k) plans: A joint employer-sponsored defined contribution plan. Funds contributed during a marriage to a 401(k) are typically marital property and can be divided. A qualified domestic relations order (QDRO) may be required to divide these accounts.

• Pension plans: Defined benefit plans, often seen in government or union jobs, can be more complex to value because the benefit is usually not realized until retirement age. Only the portion earned during the marriage is subject to division.

• IRAs (Individual Retirement Accounts): Contributions made during the marriage and growth in value are typically considered marital assets. However, any funds contributed before the marriage or after separation remain separate property.

• Military retirement benefits: These benefits, governed by the Uniformed Services Former Spouses’ Protection Act (USFSPA), can be divided through a Military Retired Pay Order (MRPO). For direct payments from the military, the marriage must have lasted at least 10 years, overlapping with 10 years of service.

• Social Security benefits: While generally not divided, a spouse may be eligible for up to 50% of your benefits if the marriage lasted over 10 years and certain conditions are met. However, this does not reduce your benefits.

Factors courts consider when dividing retirement assets

Dividing assets can be complicated, but divorcing couples find that working together via mediation can lead to a more customized divorce settlement. 

With mediation, both parties, with the help of their attorneys and a trained mediator, can divide assets more precisely to reflect their needs and long-term goals, even when complex matters are involved.

However, if litigation is necessary, it’s essential to understand how courts view the numerous factors that make up a family’s financial landscape so they can divide assets fairly. Each factor reflects the complexities of marital relationships, recognizing that not all contributions are financial. These factors include:

• Length of the marriage: Longer marriages typically result in more intertwined finances, prompting courts to assess both spouses’ financial and non-financial contributions for a fair division.

• Earning capacity of each spouse: If one spouse has higher earning potential, the court may adjust asset division to bridge the financial gap and ensure fairness.

• Contributions to the marriage: Non-financial contributions, such as raising children or managing the household, are considered alongside financial contributions when dividing assets.

• Future financial needs: Courts evaluate each spouse’s future financial needs, including retirement plans and earning potential, to promote short- and long-term financial stability.

• Pre- and post-nuptial agreements: These agreements can be upheld if they meet legal standards, but the court ensures they are fair and were voluntarily entered into.

The role of a qualified domestic relations order (QDRO) in dividing assets

If your divorce settlement includes dividing one or more retirement accounts, securing a QDRO is essential to ensure the distribution process is handled properly and in accordance with the law. 

A QDRO is an important legal document that instructs retirement plan administrators on how to split funds from your 401(k)s and pension plans during a divorce. Due to their complexity, QDROs are typically prepared by attorneys or other professionals to ensure they meet all legal requirements and are correctly executed.

Both sides must agree on the terms, and then the QDRO is submitted to the court for approval. Then, the QDRO is forwarded to the retirement plan administrator to transfer funds according to the court’s instructions. Failing to secure a QDRO could lead to serious financial complications, including potential tax liabilities and penalties.

Protecting your retirement assets during divorce

While the goal is to ensure each spouse receives their fair share, protecting your financial future during divorce is just as important. Here are some key tips to safeguard your retirement funds.

Get a clear picture of your finances

Before starting divorce negotiations, know exactly what retirement accounts you have and their current values. Organize all relevant financial documents, including account statements and contribution records, to provide your attorney with a complete understanding of your situation. 

Negotiate wisely

When negotiating your divorce settlement, consider your long-term goals and needs. Your divorce attorney can help you build a legal strategy that reflects these goals and leverages your assets to help you achieve them. For example, if your primary goal is retaining the family home, you may be able to negotiate with your soon-to-be ex to keep the house in exchange for a greater share of retirement funds.

Consider tax implications

Retirement accounts are often tax-deferred, which means withdrawals are taxed as income at your typical tax rate. Factoring in these potential tax consequences is essential when negotiating asset division, as they could affect your overall financial landscape.

Update your beneficiaries

After the divorce is finalized, don’t forget to update your retirement account beneficiaries. This simple step ensures that your assets go to the individuals you want to benefit, whether a new spouse, children, or another trusted person.

Consult with a divorce attorney

Dividing retirement assets during a divorce can be complex, especially in New Jersey, where equitable distribution rules apply. Without a clear understanding of your rights and options, you risk losing what’s rightfully yours. 

An experienced family law attorney can help navigate the intricacies of dividing the marital estate. At Dughi, Hewit & Domalewski, our skilled family law team is ready to analyze your situation, advise you on the best course of action, and represent you in negotiations or court proceedings. 

Let us get to work on your case–schedule a consultation today.