When you and your spouse decide to end your marriage, all marital property is subject to split. This includes not only the house, cash, cars, furniture and other possessions, but also retirement funds as well. If you or your spouse has a pension, 401(k), IRA or other type of retirement plan, it will likely need to be shared in a divorce.
Whether you are giving or receiving the assets of a retirement plan, you need to understand the laws that apply. Otherwise, you will be forced to pay penalties and taxes, which can significantly offset the amount of available money you’ll have after a divorce.
New York Laws
New York law states that pensions earned during a divorce may be split equitably in a divorce. The spouses may agree on a fair split or the court may use a formula. The formula commonly used is 50% x years of service during marriage divided by number of years of service at retirement. This means that a person who worked for 10 years during the marriage who retired with 20 total years would give up 25 percent to the ex-spouse.
However, this is not the only way to split up a pension. An ex-spouse may instead opt for a variation of this formula or a lump sum amount.
Dividing the Plans
Dividing an IRA is different from dividing a 401(k). An IRA is divided under a process called transfer incident to divorce. You would move over your funds in either a transfer or rollover. Once the transfer is complete, the recipient spouse takes full ownership. If the procedure is followed correctly, the spouse who gives the funds to the other spouse will not owe any taxes. However, if you did not follow the instructions for properly transferring the funds, then you will have to pay taxes as well as an early withdrawal penalty.
If you have a different type of retirement plan, you would use a Qualified Domestic Relations Order (QDRO). It works similar to a transfer incident to divorce in which you can divide the assets and transfer them to an ex-spouse or child. If done correctly, it will also be a tax-free transaction. The recipient can transfer the funds to an existing plan or an IRA.
Attention to detail is required in both cases. Things can get complicated and expensive if not done properly, so it’s best to contact a divorce attorney.
Going Through a Divorce With Retirement Funds? Seek Legal Help
Property division in a divorce can be complicated, especially if 401(k)s, pensions and other retirement plans are on the table. Formulas are sometimes used to help the courts come up with a fair split, but you still want to make sure you get your fair share in a divorce. Brooklyn divorce attorney Theodore Alatsas ESQ can help you with property division and fight for your rights to a spouse’s retirement fund. Contact him to schedule a free consultation by calling (718) 233-2903.