Money is Traditional IRA’s and 401k’s can provide us with a false sense of wealth. In Traditional, rather than Roth such accounts, the IRS awaits its slice of the pie. Remember, Traditional retirement plans do not eliminate taxes, but rather defer them until the time the money is withdrawn.
Accordingly, what may seem like $100,000 in your account, may only be worth $60,000 after you are done paying taxes. If you are withdrawing prior to the age of 59 ½, unless you qualify under rare exceptions, you will also need to pay a 10% penalty for the benefit of withdrawing your own money. Such withdrawals can become even more complicated in a divorce or separation.
Withdrawing Traditional Retirement Funds During a Divorce or Separation
One of the core tenets of a New Jersey divorce is that the status quo must be maintained. Rarely is it the status quo for retirement funds to be withdrawn early. However, there may be instances where that is occurring. If so, a judge may rule that the status quo prevails. However, in most instances, the withdraw will be a one-off or rare situation, or as part of an inappropriate action by one of the parties to the divorce.
For instance, let’s assume the Husband in a marriage withdraws $50,000.00 from his Traditional IRA. As you may be aware, IRA’s are always in one individual’s name, even if the parties are married. Nonetheless, in a divorce, IRA’s funded during the marriage are generally considered marital property. That is, they will be divided evenly between the parties during the time of the divorce, often by way of a Rollover IRA.
Early Withdrawal Divorce Hypothetical
Now, in our hypothetical, Husband has withdrawn $50,000.00 from his Roth IRA. Generally, the Wife would be entitled to one half, or 50% of this amount, or $25,000.00. Here, however, if the Husband has acted unilaterally, that is he has withdrawn these funds absent consent from his Wife or court-approval, then the Wife’s attorney can credibly make the argument that the Wife should not need to share in the penalties or taxes associated with the withdrawal. They may be able to argue, and win the argument before a Judge, that they should receive $25,000.00, and the Husband whatever remains after any taxes or early withdrawal penalties are accounted for.
The big takeaway here is that if you see your spouse withdrawing such funds, or suspect same, that you contact your attorney so that they can attempt to either resolve the issue with opposing counsel or petition the Court by way of a Motion. Arguing bad faith, you can also seek that your legal fees be reimbursed by the other party.
Conclusion
Withdrawing Traditional IRA or 401(k) funds can be a big decision at any time, but there are extra considerations at play when you are separated or heading toward a divorce. By working with an experienced New Jersey divorce attorney, you can help mitigate any such inappropriate actions taken, or considered to be taken, by your ex.
