I have found that many of my clients who are going through a divorce have a lot of misconceptions regarding the division of their retirement accounts they established before their date of marriage. My clients’ initial impressions have been mixed. During initial consultations, some clients have informed me that their spouse would be entitled to 50% of the total retirement account, while others seem to believe that their retirement account is not subject to equitable distribution because it originated before their marriage.
I am hopeful that the following two scenarios offer some clarification.
Scenario 1 – Retirement Account Is Not Subject To Distribution: The account would need to be established prior to your marriage with no contributions made during the period extending from your date of marriage through the date of complaint. The most common scenario would be that you have a 401(k) or a rollover IRA from a previous employer that was established before your marriage. As you did not receive any benefit from your employer during your marriage (ie: employer matches, employee contributions, deferred compensation options…etc), it would follow that this asset was not accumulated during the marriage and not subject to equitable distribution.
As a practical tip, it is important to maintain an account statement displaying the value as close to the date of your marriage as possible. This will greatly aid your efforts in proving that the account was indeed premarital and not subject to any possible distribution to your spouse. Many brokerage houses will not maintain account statements longer than 10 years, so keeping a copy in your personal records may be a good idea to offer sufficient proofs.
Scenario 2 – Retirement Account Is Partially Subject To Distribution: When a portion of your retirement account was accrued prior to your marriage, the situation gets a little more complicated.
As stated above, you are entitled to 100% of the retirement account accumulated before the marriage. However, the monies deposited or supplied by your employer during your marriage are subject to equitable distribution, usually under a 50% distribution allocation.
Good recordkeeping is essential here, as you will need to provide your attorney with a statement showing the value of the account prior to the date of marriage. This will be necessary in order to develop the exempt value of the account and will assist your attorney in reaching the proper percentage that is divisible.
For purposes of example, if you had $100,000 in your account and $20,000 was pre-marital, a standard distribution to your spouse would be $40,000.
- Account Total Value = $100,000
- Marital Value = $80,000
- Spouse 50% Distribution = $40,000
- Your Portion = $60,000 ($20,000 exempt and $40,000 marital
Additionally, you are entitled to classify the growth of the portion of the account that was premarital as exempt. Without the assistance of an accountant or actuary, the isolation of the growth portion gets a little tricky. However, to simply the process, attorneys will often look at the historic average earnings of the account during the time period associated with your marriage. Once this growth is isolated, it is a fairly straightforward process to impute an estimated level of earned interest for this exempted portion of the asset.
Please remember that New Jersey is an equitable distribution state. Parties going through a divorce are not always entitled to an automatic 50% distribution of marital assets and there are various statutory factors that must be taken into consideration before a distribution percentage is established
If you, or someone you know, is going through the divorce process and has questions regarding equitable distribution or other related matters, please feel free to contact me in my firm’s Lawrenceville, New Jersey office.