Dividing Retirement Accounts in a New York Divorce

Division of property in a New York divorce follows the principle of equitable distribution, which involves making a valuation of each marital asset. This includes each spouse’s retirement accounts. However, unlike a simple bank account, retirement funds may have both present and future values to ascertain. What’s more, division of these accounts may have tax implications. Understanding the nuances of different retirement plans is important to securing a fair outcome.

There are three major categories of retirement accounts that are subject to division as marital property:

• Employer-sponsored plans (401(k)s) — These plans, funded by employee contributions and often matched by employers, are considered marital property if contributions occurred during the marriage. The appreciation that took place in the 401(k) after the date of marriage is also marital property. Division of a 401(k) typically requires a Qualified Domestic Relations Order (QDRO) to be issued by the court. Otherwise, withdrawals from a 401(k) before age 59 ½ are taxable and subject to a 10 percent early withdrawal penalty.  A QDRO instructs the plan administrator to pay a portion of the benefits directly to the former spouse. The specific portion is determined based on the length of the marriage and the growth of the account during that period.
• IRAs (traditional and Roth) — Individual retirement accounts offer tax advantages, but their treatment in a divorce differs based on the type. Traditional IRAs, funded with pre-tax dollars, are generally divided like 401(k)s, using a QDRO to distribute a portion of the account balance accumulated during the marriage. Roth IRAs, funded with after-tax dollars, present a trickier situation. Contributions (considered separate property) are typically not subject to division. However, any growth attributable to those contributions during the marriage might be. This apportionment requires careful analysis of account statements and potentially expert financial testimony.
• Defined benefit plans (pensions) — Pensions offer a guaranteed monthly income in retirement. Dividing these benefits can be particularly intricate. Unlike 401(k)s with a lump sum balance, pensions involve a future income stream. Accurately determining the marital portion requires considering factors like the employee’s vesting schedule and the date of marriage relative to their employment start date. A court may order a “direct pay order,” instructing the plan administrator to pay a specific percentage of the monthly benefit directly to the former spouse. Alternatively, the court might award the spouse a lump sum amount, calculated based on an actuary’s present value analysis of the future pension stream.

Navigating the intricacies of retirement account distribution in a New York divorce requires expertise. It is helpful to work with a New York divorce lawyer who understands the requirements and knows how to draft QDROs and other documents needed to divide retirement accounts effectively. 

The Law Offices of Randy S. Margulis in Williamsville and downtown Buffalo represents clients throughout Western New York today in all aspects of the divorce process. Call us at 716-886-9600 or contact us online to schedule an initial consultation.