Pensions Plans

Pension and retirement assets can sometimes be worth more than your house. Every month, you get a statement for your bank accounts and stock brokerage security accounts. But
you may get a statement for pension or retirement assets only once a year. You should take a careful look at what you have, and in your divorce you should have clear goals about what you
want to do with your (and your spouse’s) pension and retirement assets.

There are several types of pension and retirement assets. Each are treated differently in divorce.

The Traditional ‘Pension Plan’ If you work for a large corporation or the government, you may have a pension plan which will pay you benefits when you retire. A pension plan is an employee benefit. The company agrees to make regular contributions to a pool of money set aside to make payments made to employees after they retire. The employee does not ‘own’ any part of the pension plan, but receives payments from the plan.

The two types of pension plans are ‘defined benefit’ plans and ‘defined contribution’ plans. The basic difference is what each plan promises its participants.

A defined benefit plan set out exactly how much retirement income employees will get once they retire. Payment usually depends on how many years working for that employer, and your salary.

A defined contribution plan only specifies what each party – the employer and employee
– contributes to an employee’s retirement account; the amount of that will be paid depends on what the money is invested in, and how that investment performs. There will be a statement that shows how much is in your account for that defined contribution plan.

Traditional pension plans, or defined-benefit plans, have become increasingly rare and
replaced by retirement benefits that are less costly to employers, such as the 401(k) retirement
savings plan.

When you get divorced, the right to get payments from the pension plan will be divided
between the husband and the wife. Almost always, you will need a Court Order, called a
Qualified Domestic Relations Order (called a ‘QDRO’ for short), to tell the pension plan administrator how to divide the payments.

401(k) Plan A 401(k) plan is a company-sponsored retirement account to which
employees can contribute income, while employers may match contributions. It is named after the section of the Internal Revenue Code which controls this kind of plan.

There are two basic types of 401(k) plans, traditional 401(k) and Roth 401(k). The main difference is how they’re taxed. In traditional 401(k), you contribute money ‘pre-tax’, which means the money your contribute reduces your taxable income, and you pay less income tax
now. When you take the money out, you have to pay tax on the withdrawals.

Employee contributions to Roth 401(k)s are made with after-tax income: you contribute
money to the plan every paycheck, but you don’t get a reduction in your taxable income now.
However, when you take the money out, you do not pay taxes on it.

In divorce, both traditional and Roth 401(k) plans are treated about the same. You will need a QDRO to divide up the 401(k). If the QDRO is done correctly, you will avoid some very expensive tax problems.

IRA – Individual Retirement Account These are pretty useful retirement accounts, and you own it and control it. You get a reduction in income for the money you put into the IRA (up to the yearly limit), and you can invest it in a wide variety of types of investments. You don’t pay taxes on the money until you withdraw it.

What Happens to Pension and Retirement Assets In Divorce In New Jersey, the general rule is that assets that you and your spouse have gained while you are married, will be equitably divided when you get divorced. The basic law is set out in N.J.S.A. 2A:34-23.1 – Equitable distribution criteria. What this means in practical terms is this: The part of the pension asset that was earned during the marriage will be divided equitably (‘fairly’) between the husband and wife.

These are the general rules. However, you can understand that it can get really
complicated, and there are exceptions to every rule.

You need to take a hard look at your pension assets and your spouse’s pension assets
when getting divorced.