Splitting Up a 401(k) in Divorce

When you get divorced, your final settlement or judgment will control how your property will be divided. Retirement accounts such as 401(k)s are significant assets for many couples, and they are subject to division as well. But dividing a 401(k) comes with its share of complexities.

First, be aware that New York law applies the rule of equitable distribution. This means each spouse gets to keep their separate property while marital property gets divided. Separate property includes assets owned prior to marriage or received at any time via gift or inheritance. Marital property generally includes all assets acquired by either spouse during the marriage.

401(k) contributions you made while married are considered marital property, as are the investment gains (appreciation) that took place in your 401(k) after the date of marriage. The amount that was in your 401(k) before the date of marriage, as well as any gains it earns, remains your separate property.

Upon divorce, most property is divided simply by court order. However, division of 401(k)s and other ERISA-regulated accounts requires an additional measure. The spouses must obtain a qualified domestic relations order (QDRO) in order to avoid taxes and penalties that would otherwise result. Typically, withdrawals taken from a 401(k) before age 59 and a half are taxable and subject to a 10 percent early withdrawal penalty. With a QDRO, however, the transfer is tax-free for both parties. The recipient spouse often puts the money into an individual retirement account (IRA), both for tax reasons and because IRAs provide a wide range of investment options.

Rather than split up a 401(k), some couples reach a buyout agreement, providing that the spouse with the larger 401(k) will give the other spouse a larger share of other assets, so dividing the 401(k) becomes unnecessary. The buyout allows the couple to avoid the QDRO issue entirely.

401(k)’s are not the only type of retirement account that has special rules and procedures. There are additional rules concerning pensions, IRA’s 493(b) plans and other account types. 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 properly.

At the Law Offices of Randy S. Margulis in Buffalo, we handle all aspects of complex marital property division for clients throughout Western New York. Feel free to call our attorneys at 716-886-9600 or contact us online.