Asset Division Dilemma: The House Or The Retirement Account?
You and your spouse have sat down to negotiate your division of marital assets and there is a very big decision that the two of you will need to make.
You own a home together — a home that you very much want to stay in after your divorce — and your spouse has a retirement account through work that he/she very much wants to remain intact and free from division. Your spouse makes you an offer: you can take 100% of their equity in the home and assume sole ownership of the home, if in return, you give up any claim to the retirement account. Dollar-wise, the amount of money in play appears to be about the same.
Should you say yes? It’s exactly what you want, after all. Or is this offer too good to be true?
Let’s take a closer look at this very common asset negotiation tactic.
Retirement accounts as joint marital assets in divorce
Retirement accounts are considered marital property in New Jersey and thus subject to asset division in divorce, under the state’s “equitable distribution” law. Generally, any monies deposited into a 401k account or other retirement or pension account during the term of the marriage are subject to division in a divorce. The term of the marriage generally means the date you were legally married until the date that the complaint for divorce was filed. The amount to be divided includes employee or employer contributions to the account as well as any interest income generated.
Once the split of the 401K has been established, a Qualified Domestic Relations Order (QDRO) can be established that provides instructions for how the 401K is to be distributed upon the spouse’s retirement. The spouse receiving the share can also immediately rollover their amount into their own retirement account or withdraw it as cash (with additional tax consequences).
Think carefully before negotiating away access to retirement funds
If you have considerable equity in your home, on paper, a swap of 100% equity in exchange for a portion of a retirement account might look like a great bargain. The idea of owning your own home may also be extremely satisfying emotionally and bring about feelings of safety and security, especially if you are still raising young children. Thinking about a far off retirement age probably does not produce these same feelings. Besides, once the home is yours, you may think, you can simply sell it in 20 years when you are ready to downsize and use the proceeds of the sale as your retirement nest egg.
These thoughts are all valid — we get it. Home ownership is a big deal. But we also want you to please remember one of the first (and best) rules of asset negotiation in divorce: don’t make decisions based on emotion.
The financial pitfalls of not using divorce as a retirement planning tool
Before you agree to anything, put your emotions aside and consider the other side of this deal.
Homes cost money to maintain. Over the next few years, you may need a new roof, or maybe the heating system will need replacing — or both! Once your spouse signs over their share in the house, any mortgage bill will be your sole responsibility, as well as property taxes and homeowner’s associations fees. Will your savings and income become drained paying for these things? When you do sell the house down the road, how much will you really be netting after subtracting these expenses? And what if there is a real estate market dip in your area?
On the other hand, money that sits in a stable retirement account doesn’t come with these extra costs. It’s money that will be there for you, so before you agree to sign away your rights to retirement, think carefully about which option is truly better for your financial future. Are there other assets that you can use to buy out your spouse’s home equity — such as equity in a vacation home that you don’t mind giving up, or other real estate holdings, or other large asset (or collection of smaller assets)? Take a look around your neighborhood — are there other less expensive homes for sale in your same area/school district that you can roll your equity into after selling your home?
And if you are set on keeping your own home and are seriously leaning towards the deal on the table, please do one final analysis by taking a look at your own retirement assets. If you are going back to work after being a stay at home parent, will your new job offer a retirement program? If you are going into public sector work, such as working for New Jersey public schools, investigate whether you can gradually “buy back” years of retirement to make up for years that you did not work outside the home. Meeting with a financial/retirement planner first is also advised to get your retirement on track.
Safeguard your future by exploring all your options, and talk to an experienced family law attorney, before making any final decisions.
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