When it comes to property division during a divorce, can one access retirement funds without penalty? In some cases it is possible, but this is why we have to always look to the type of plan that we have. There is something called the pendente lite period. Now pendente lite is Latin and it basically means pending the litigation. The period of litigation begins with the filing of the complaint for divorce and it ends with the entry of the final judgment of divorce. During this pendente lite period we can, with a court order (called a QDRO – qualified domestic relations order), take money out of that 401K or that 403B.
There’s two ways to do that, we can file a motion with the court and ask the court and say, “I know I’m going to receive a certain percentage of this qualified plan.” I usually do it with a letter from an actuary that says the plan has a value of $100.000, the marital portion is $40,000, so this way the judge knows exactly what percentage my client is going to receive in equitable distribution.
Can you access retirement funds acquired during property division without penalty?
If my client needs money now, I will file a motion. I might need $20,000. Now my client knows that the $20,000 is going to be taxable to her but because we’re doing it with as a qualified domestic relations order on a qualified plan, she will not have a penalty. So we take that money and then she’s going to owe her taxes on it. We work with the tax expert to figure out exactly what those taxes are going to be or as close as we can realistically get to them and that is the money that is available to fund litigation, maybe pay off something that has to be paid off.
You cannot do that with an IRA. An IRA will not be divided between the two parties until after the entry of the final judgment of divorce and, with an IRA, if you’re less than 59 and a half years old, you’re going to have that 10 percent penalty.
New Jersey attorney Cynthia Ann Brassington is certified by the Supreme Court of New Jersey as a Matrimonial Law Attorney, and regularly helps people to resolve their divorce-related issues, from property division, to child support, and custody. To learn more about Cynthia and her practice visit www.LinwoodFamilyLaw.com