06 Nov We’re divorcing. What will happen to this 401(k)?

Q. We are getting a divorce — staying together only because we both lost our jobs. We know we can take from 401(k)s without penalty but what will this mean when we split assets and finally file?
— Husband

A. New Jersey is an “equitable distribution” state, which is not the same as “equal distribution.”

In the event of divorce, marital assets and debts are to be divided in an equitable — fair — manner between spouses, taking into consideration the facts of each particular case.

The first inquiry for purposes of equitable distribution is whether the asset or debt at issue is marital in nature. If marital, each spouse would have an equitable interest in the asset and responsibility for the debt upon divorce, said Thomas Roberto, a family law attorney with Adinolfi, Lieberman, Burick, Falkenstein, Roberto & Molotsky in Haddonfield.

In general, he said, a retirement asset acquired during the marriage is considered a marital asset subject to equitable distribution.

“More specifically, the portion of the retirement asset accumulated during the marriage, and any appreciation on that marital portion, is subject to division between spouses regardless of in whose name the account is titled,” Roberto said. “Loans taken from retirement accounts may likewise be subject to equitable distribution, depending on the circumstances and the purpose for which the loan/withdrawn funds were used.”

Two key considerations for purposes of determining how loans and/or withdrawals from a retirement asset would be treated at the time of divorce are whether both spouses consented to or had knowledge of the loan/withdrawal, and whether the funds obtained via the loan/withdrawal were used for a marital purpose, such as for the payment of marital expenses, he said.

“If one spouse encumbers or liquidates a marital asset and uses those funds for a non-marital purpose without the knowledge or consent of the other spouse, this may be considered an act of `dissipation’ or `waste,’” he said. “In that event, the spouse who acted unilaterally may be held responsible for the funds withdrawn — and any applicable penalties and interest — at the time of divorce.”

But, he said, if both spouses agree to withdraw from and/or borrow against one or more retirement assets, then neither would be penalized for doing so at the time the assets are distributed upon divorce. Instead, both spouses would share responsibility for the loan/withdrawal to which they agreed, Roberto said.

“Loans taken out against retirement accounts with consent of both spouses would likely be treated as marital debt for which the parties share responsibility in equitable distribution. In the case of withdrawals, each spouse’s share of the asset would be reduced in proportion to the total amount withdrawn,” he said.

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This story was originally published on Nov. 6, 2020.

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