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Splitting IRAs and 401(k)s in a New Jersey divorce

| Sep 5, 2013 | Divorce |

It used to be that the biggest asset to consider when dividing property in a divorce was the house, but that isn’t necessarily the case anymore. With the uptick in divorce among older Americans, many New Jersey spouses have retirement accounts that exceed the value of the marital home.

But even if a retirement account is worth more than the house, there are still important matters to consider before simply deciding on a percentage of retirement funds for each spouse.

First of all, it is important to remember that New Jersey is a state that distributes marital property equitably, and “equitably” does not mean “equally.” One spouse may be entitled to a greater share of marital assets, and it is best not to negotiate a divorce settlement without a legal advocate on your side.

When considering the division of a 401(k) or an IRA, keep in mind that there may be a tax liability attached to withdrawing the funds. For instance, a Roth IRA is generally going to be taxed less than a 401(k), so that difference should be accounted for in the divorce settlement.

Also, there is an important document called the Qualified Domestic Relations Order, commonly known as a QDRO. This document will be used to divide a 401(k) in a divorce, and anyone dealing with a QDRO will want to go over it with an attorney before finalizing a divorce settlement and distributing 401(k) funds.

Another concern is rolling over money from a 401(k) into an IRA. This may be a good idea, but people who need the 401(k) money shortly after the divorce may want to take a one-time payment in order to avoid a tax penalty later for withdrawing the funds from an IRA.

Again, New Jersey residents should consult with an attorney before dividing retirement accounts. Too often, people agree to settlements that won’t support them in later years.

Source: Forbes, “4 Divorce Mistakes That Can Derail Retirement,” Marylin Timbers, Aug. 21, 2013

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