If you live in New Jersey and you have a 401(k), an IRA or an annuity that you need to divide in a divorce, this could be a complex process. There are tax implications you should be aware of during the process of property division, and you may want to work with a financial professional.
401(k)s and pensions
There are several options for couples who need to divide a 401(k). One is not to divide it at all but for one spouse to keep it and the other to take another asset of equal value. This may be the easiest option, but you and your spouse might need to calculate both tax and how much value the 401(k) might accumulate. To divide it, you will need a document known as a qualified domestic relations order. The 401(k) could also be liquidated if you qualify, but this could be costly in terms of taxes and penalties. If you are older than 59 1/2 or have left your employer, the 401(k) could be rolled over into an IRA. Rules for pensions will vary, but it may be possible to simply have benefits paid directly to your former spouse.
IRAs and annuities
Dealing with an IRA is less complex than a 401(k) although it is important when calculating value to note whether distributions will be taxed. Only a court order and not a QDRO is necessary to divide an IRA. The easiest approach is to roll the IRA into the other spouse’s account. Annuities are generally much more complicated, and taxes, penalties and other fees must be considered. This may be another case where it is easier for one spouse to keep the annuity and the other to take a separate asset.
With these complexities in mind, you may prefer to try to negotiate an agreement for property division instead of going to court. This can be less costly and stressful than divorce litigation, and your attorney may help with the process.