From the perspective of wealth management, the most important aspect of dividing property in divorce is usually the treatment of your non-qualified and retirement assets. It is a big mistake for couples to divide traditional retirement assets down the middle, so you need to be careful about taking a more thoughtful approach that considers the realities of your life after divorce as well as potential instances that could impact the division of these assets such as one spouse passing away before the alternate payee begins to receive retirement benefits.
The majority of private sector income plans across the United States are designed to qualify for favorable tax treatment under compliance with a law known as ERISA or the Employment Retirement Income Security Act, in order to protect these very valuable tax benefits. Individuals who participate in qualified plans that fall under the ERISA umbrella are not eligible to take early withdrawals from their plan without facing penalties. There are exceptions, however, when plans are divided for the purposes of equitable division of marital property, alimony or child support. In this instance you would need to use a qualified domestic relations order. QDROs need to be put together even if you already have a divorce decree stipulating the division of retirement assets. Some of the key tips associated with the division of these assets are:
- Anticipating and minimizing tax liabilities from cash distributions.
- Determining how the pension plan will be divided.
- Dividing tax basis for contributions made after taxes for defined contribution plans.
- Prorating contributions to defined contribution plans via the divorce date regardless of the contribution timing.
- For non-qualified, non-divisible retirement plans including a formula to allocate future payment tax consequences.
Consulting with a knowledgeable attorney can help you understand the financial implications of dividing retirement plans in divorce. It is a good time to set up a meeting with your New Jersey estate planning attorney so that you can be prepared for your future. Post-divorce, there’s a good chance you need to update your forms and information.