12 Jun What happens to retirement plans with divorce?
Q. I’m planning to get a divorce after 12 years. We have no kids and we both have retirement plans, but my husband always saved more than me. How can I be sure I get a fair amount of our retirement money?
— Wife for now
A. To answer this question, you must first understand that New Jersey is an equitable distribution state.
Marital assets in New Jersey are not necessarily divided by a 50/50 split but in a way that is deemed fair and equitable, said Amber Leach, a certified divorce financial analyst with AXA Advisors/R.I.C.H. Planning Group in Morristown.
“Deciding what is fair and equitable can be subjective,” Leach said. “As defined in N.J.S.A. 2A:34-23.1, the court takes into consideration many factors. These factors are a guide in determining a fair and equitable division of assets for your case.”
Leach said the method you and your spouse choose to achieve your divorce will determine how you will reach a fair settlement.
In mediation and collaborative law cases where decisions are self-determined, you and your spouse, with the help of certain experts – lawyers, financial experts, therapists, etc. – get to decide what is fair and equitable, she said. In litigation, the courts may ultimately decide it for you.
Leach said the first step to deciding what is a fair division of your retirement money is to identify all the retirement assets accumulated during the marriage.
“The titling of assets is irrelevant, so the fact that your husband has saved more than you during the marriage is irrelevant,” she said. “All accounts, regardless of title, that contain funds accumulated during the marriage will be included in the marital pot.”
She said once you have identified all the accounts that hold your retirement assets, you will then need to have the marital portion of each of them valued. This is where it can get tricky.
First, calculate and exclude from the marital assets any premarital portion of the accounts.
Leach offered this example. Let’s say you’ve been married for 12 years but perhaps you have been contributing to your retirement plan for a total of 15 years. The three years of contributions before you were married and any passive income from these contributions can be considered premarital and excluded from the marital assets.
“Often experts use a coverture fraction to value the marital portion of the plan,” she said. “A coverture fraction takes into account the time of marital participation in the plan divided by the total time of participation in the plan. That ratio is then multiplied by the present value of the plan to calculate the value of the marital portion to be included in equitable distribution.”
If there is no premarital portion to quantify, then the valuation is much easier, she said.
For defined contribution plans such as 401(k)s and IRAs, current statements can show you the present cash value of the accounts. For defined benefit plans such as company pension plans, it is imperative to hire a qualified pension valuator to determine the present value of the marital portion of the pension, Leach said.
“Once you have the present value of the marital portion of all the retirement assets and the court factors to consider, you will be able to move forward in creating a marital settlement agreement that you deem fair and equitable,” she said.
Good luck to you.
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This story was originally published on June 12, 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.