What to Know About Dividing Retirement Accounts in a Divorce

In a New York divorce, assets and debts acquired during the marriage are subject to equitable distribution, which means they are divided fairly but not necessarily equally. Among the assets to be divided are retirement accounts owned by either spouse. However, these accounts are subject to special considerations concerning their valuation and tax treatment.

The extent to which retirement accounts are considered marital property depends on when funds were contributed to the accounts. Generally, any contributions made during the marriage are subject to division upon divorce. Contributions made before the marriage or after the date of separation may be treated as separate property. 

The process of dividing retirement accounts varies depending on the type of account involved. Common types of retirement accounts include defined contribution plans, like 401(k)s, and defined benefit plans, such as pensions. Defined contribution plans are relatively straightforward to value and divide. The account balance on a given date (such as the date of separation or divorce) can be directly assessed and divided. Each party typically receives a portion of the account balance proportional to the duration of the marriage compared to the total duration of account contributions.

Pensions are more complex to value and divide because their value is not based on accumulated contributions but on the expected future payouts, which depend on factors like the employee’s length of service and salary history. Benefits may be vested, which means they are guaranteed even if the account owner leaves their position of employment, or unvested, which means benefits are contingent upon future employment with the company. Valuation of unvested benefits is more complex. Actuarial analysis may be needed to calculate the present value of the future benefits, or the parties may agree to divide payments as received, a method known as “if, as, and when” payments.

A critical aspect of division of retirement accounts is a qualified domestic relations order (QDRO). This is a legal order subsequent to a divorce decree that splits and changes ownership of a retirement plan to give the divorced spouse their share of the asset or pension plan. This order is required for any retirement plan covered by ERISA, including 401(k) plans and pensions. The QDRO addresses the tax implications involved in the transfer, allowing the funds to be rolled over directly into the recipient’s retirement account, thereby deferring taxes until the funds are withdrawn.

Without a QDRO, any attempt to split the retirement accounts could result in significant penalties and taxes. Early withdrawal from a 401(k) could lead to taxes on the distribution and a 10 percent early withdrawal penalty. The QDRO protects both parties by ensuring that the division of the retirement assets complies with tax laws and avoids unnecessary penalties. An experienced property division attorney can take appropriate measures so that your retirement account is protected from penalties and from unfair distribution. 

The Law Offices of Randy S. Margulis in Williamsville and downtown Buffalo represents Western New York residents in all types of divorces, including cases involving the division of retirement assets and other investment accounts. Please call 716-886-9600 or contact us online to schedule a consultation.