Dividing retirement assets, such as a 401k, is a necessary part of most divorce settlements. As with many other types of marital assets, New York’s equitable distribution laws call for certain retirement assets to divide fairly between divorcing spouses.
Since these assets often represent significant financial resources, both parties need to understand how the process works.
Understanding when retirement assets are up for division
Under equitable distribution laws in the state of New York, retirement accounts like 401ks, pensions and IRAs fall under the category of marital property if a spouse earned them during the marriage. The court examines the circumstances under which the assets accumulated. This determines how much of the retirement account qualifies as marital property and how much remains separate.
The court typically looks at the value of the retirement assets at the time of marriage and the time of divorce. Only the portion accumulated during the marriage is subject to division. For example, if one spouse contributed to a 401k before the marriage, those funds would likely be separate property. However, contributions made during the marriage, along with any growth, would divide equitably.
How to divide retirement assets fairly
A common tool used in dividing retirement accounts is a Qualified Domestic Relations Order. A QDRO instructs the retirement plan administrator to distribute a portion of the account to the spouse. This ensures that the receiving spouse can avoid penalties or taxes when withdrawing the funds.
It is also important to consider the long-term tax implications of dividing retirement assets. Withdrawals from accounts like a 401k may be subject to income taxes, which could affect the true value of the asset. Courts often consider this when dividing assets to ensure fairness.
In some cases, spouses may negotiate alternate arrangements. This could entail offsetting the value of a 401k with other assets like real estate or cash. Each spouse’s financial goals and needs play a role in determining the final division. When both sides have a clear understanding of which assets are subject to division, and how much of those assets are necessary to keep retirement on track, it becomes more likely to settle on a result that works well for everyone.
