While each divorce case has its own unique set of facts, circumstances and complexities, there are certain core issues which may need to be addressed, namely (1) the custody and support of any children of the marriage; (2) the necessity, extent, duration and amount of any spousal support or alimony; (3) any contributions toward professional fees; and (4) the equitable distribution of marital assets and liabilities. This series of blog posts will focus on the last item, equitable distribution, and specifically, the distribution of retirement assets in divorce.
First, let me give a brief summary of what is meant by equitable distribution. Note that I use the term “equitable” and not “equal”. Under the applicable New Jersey Statute, NJSA 2A:34-23(h), it refers to the court’s authority “to effectuate an equitable distribution of the property, both real and personal, which was legally and beneficially acquired by them or either of them during the marriage”. While it is possible that certain assets may be divided equally, depending upon the nature of the asset and/or the duration of the marriage, NJSA 2A:34-23.1 lists a multitude of factors that a court must consider in order to determine the extent to which a distribution of property would be “equitable”. That statute also provides that there is a rebuttable presumption that each party made a substantial financial and non-financial contribution to the acquisition of income and property while the parties were married. Addressing these factors, the court is to make findings as to an asset’s eligibility or ineligibility, its valuation, and finally, its “equitable” distribution. In preparing their case, whether for settlement, discovery or for trial, the parties and their attorneys should go through the same sort of analysis in identifying which assets may be subject to equitable distribution, their values and how they should be divided between the parties. With certain qualifications, marital assets subject to equitable distribution are generally defined as those acquired between a date of marriage and the date the complaint for divorce is filed.
In years past for most “average” divorce cases, the principal and usually most valuable asset of the parties which was subject to equitable distribution was the marital home. Whether due to declining real estate values or equity positions, or the lack of affordability in home ownership, this is no longer as true today. In many cases now, retirement assets accumulated by the parties during the marriage are the most valuable. What is meant by a “retirement asset”? Generally this refers to monies, funds or benefits which the tax laws allow to be saved or accumulated “tax-deferred” to be used, accessed or paid at some future time, presumably when the person is retired from active employment. There are rules and limits as to what would qualify as a retirement asset. They may be funded individually or through one’s employment. This blog post will focus on retirement assets which have been funded individually.
If funded individually, one is generally talking about something referred to as an IRA, which stands for Individual Retirement Account. Tax laws allow persons to contribute up to a set amount into an IRA each year. An IRA can be held in a bank savings account or CD, a brokerage, a stock or mutual fund account, or any number of other forms of investment. Depending upon one’s income level, you may be allowed to deduct some or all of the amount contributed into an IRA from one’s taxable income that year. Further, even if not deductible, any future growth or income of the IRA would be tax deferred, meaning that same would not be subject to income tax at that juncture, but rather taxes would become due when monies from the IRA are withdrawn or paid therefrom upon reaching a defined retirement age. Again, there are rules governing what would qualify as an IRA account, and which are distinguishable from other types of savings and investments parties may have, even if the “intent” is that they may be used some day for retirement.
Some IRAs are designated as a “rollover” IRA. What does this mean? Often persons accumulate funds in a retirement plan sponsored by their employer. When they leave that employment they may elect to transfer these funds out of that plan. If they want to avoid being assessed penalties or taxes on these funds at that juncture, you would need to transfer them into another tax-deferred retirement account. While sometimes they can be transferred into a comparable retirement plan with a new employer; most people choose to transfer them into an IRA account which they establish, designated as a “rollover” IRA, which transfer is a tax-free event. The treatment and distribution of “rollover” IRAs in divorce is generally the same as individually funded IRAs.
How are these IRA-type retirement assets handled by way of equitable distribution? To the extent the IRAs were funded during the course of the marriage, they would be subject to equitable distribution. The same would be true to the extent the proceeds contained in a rollover IRA represented contributions made into a prior employer-sponsored plan during the course of the marriage. Depending upon whether one or both parties contributed to their own IRA accounts during the marriage, rather than splitting each individual account, the most common approach is to “equalize them” and rolling over any differential. For example, if the husband has $75,000 in marital IRA’s and the wife $25,000 in marital IRAs (for a total of $100,000), the sum of $25,000 would be rolled over from the husband’s IRA account to “rollover” IRA account established by the wife so that so that each would then have $50,000 worth of IRAs. This assumes that these amounts are all “marital”, and that there are no factors mitigating against their equal division. This also assumes that these IRAs should not be treated differently as part of an overall scheme of equitable distribution. It is important to note that as tax-deferred assets, there are certain rules that must be followed in order for these types of IRAs to be transferred from one spouse to the other. Cashing them in may result in significant tax consequences. To avoid this, there are protocols which would allow IRA funds to be “rolled over” tax-free from one IRA account to another. Often this can be can be accomplished by the completion of certain rollover forms. On rare occasions, however, some companies may insist upon a Qualified Domestic Relations Order (QDRO) to transfer the IRA funds, which I will address in a later blog post.
There is an important consideration which must be stressed. Many people may view an IRA to be like any other savings or investment account. They are not. IRAs are tax-deferred assets. There are limits on how and when you can withdraw them, and there will be taxes due when you do. Regular savings or investments are funded with after-tax dollars. While you may owe taxes on any interest or capital gains, there are no limits or taxes due on one’s use or withdrawal of same. If a divorcing couple has $50,000 in an IRA and $50,000 in a bank CD, it should be not be a matter of one party keeping the IRA and the other the CD as an equal trade off. It is not. The $50,000 IRA is worth much less in net dollars considering the taxes due whenever those funds are withdrawn.
In a future blog post I will provide an overview of employer-sponsored retirement assets and how they are dealt with in divorce.