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The bitter truth about divorce and retirement accounts

On Behalf of | May 23, 2019 | Asset Divison |

Many people know that divorce has an impact on wealth, but some high asset couples may not realize how much of an impact it can have on retirement. Though the laws of equitable distribution reign supreme in New Jersey divorce cases, when it comes to retirement accounts, the rules on how to split them are not as cut and dried. Some retirement accounts have different parameters that can affect the outcome of a divorce settlement.

Careful consideration of personal and spouse retirement accounts during the divorce process can help to minimize a variety of issues that can create additional financial and tax complications after the ink is dry on the settlement.

Retirement accounts create challenges

A spouse who has amassed stocks and retirement accounts from employers may still have to share a portion of those proceeds with his or her spouse. One way some spouses try to avoid sharing their retirement accounts is to cash them out prematurely. This cheats the other spouse out of his or her portion of the marital assets.

Though premature 401(k) and pension plan disbursements are often subject to taxation, some partners would rather incur the additional expense to spite their spouses and reduce the amount of what they receive in the settlement. One way some couples overcome this challenge is with a premarital contract that clearly outlines how both parties are to split their retirement accounts.

A QDRO offers protection

A spouse can ask the courts for a qualified domestic relations order to prevent his or her share of the soon-to-be ex-spouse’s retirement and pension plans from taxation. The QDRO also protects nonemployer partners’ rights to receive survivorship benefits and gives them some control over how their share of the funds are dispersed. QDROs do not cover retirement private, government, military and other types of retirement accounts. These decrees are complex, and many people find it helpful to work with a financial expert or divorce attorney.