How Retirement Accounts May Be Divided During a Divorce

The nest egg you’ve put away for retirement is the product of your hard work and careful savings over a lifetime, and you might think it is yours alone. But in a New York divorce, retirement accounts are considered marital property to the extent they were accrued during a marriage. As such, they are part of equitable distribution of assets, which means that they are to be divided fairly though not necessarily equally between you and your spouse.

Dividing retirement accounts during a divorce can be complex because various types of accounts are subject to their own rules and tax implications. For some types of accounts, a Qualified Domestic Relations Order (QDRO) is essential, as it allows your spouse to obtain his or her share of your account without incurring immediate tax liabilities or penalties that are typically triggered by early withdrawals.

The following are the considerations that apply in dividing basic types of retirement accounts:

1. Defined benefit plans — These include traditional pension plans that promise a specified monthly benefit upon retirement, based on salary and years of service. The challenge in dividing these accounts lies in determining the present value of the future benefits. A QDRO is often necessary to facilitate the division. These accounts are divided in proportion to the time during the marriage of the participants time in the plan. The parties share equally the time during the marriage. The non-titled spouse will get that percentage when the participant retires. The QDRO will provide if a survivor option must be selected as well as the division of any pre-retirement death benefits. It is important that the language in an agreement is clear and specific so as to not waive anything that the non-titled spouse is entitled to. 
2. Defined contribution plans — Accounts such as 401(k), 457 and 403(b) plans are funded by contributions from an employee and sometimes the employer. Their value fluctuates based on investment performance. A QDRO is required to transfer funds tax-free between spouses at the time of divorce. The amount of the account that accrues during the marriage (date of marriage to the date a divorce action is commenced) is divided, plus or minus any gains/losses on that sum from the commencement date of the action until the funds are divided. This often poses some challenges as many plans will not compute the gains/losses on the premarital share or the post-divorce contributions. 
3. Individual retirement accounts (IRAs) — There are two types: traditional IRAs, which may include pre-tax contributions, and Roth IRAs, which involve after-tax contributions. Division of an IRA does not always require a QDRO. The divorce decree can specify that the division is a transfer incident to divorce or a rollover of funds, either of which will make the transaction tax-free. You will need to check with your plan to see if a rollover can occur without the necessity of a QDRO. 
4. Thrift savings plans (TSPs) — These are federal employee retirement accounts similar to 401(k) plans. Dividing a TSP requires a QDRO, and special procedures must be followed to comply with federal regulations.

While a QDRO can help in avoiding penalties, distributions from retirement accounts may still be taxable, depending on the type of account and how the division is structured. Distributions from traditional IRAs and 401(k)s are taxed as ordinary income, while Roth IRA distributions may be tax-free if certain conditions are met.

In dividing retirement accounts, it’s important to ascertain the value of the accounts at the time of the divorce. The valuation date is generally the date of the commencement of the divorce action. A skilled New York equitable distribution attorney can work with appropriate financial experts to make sure that your interests are properly evaluated.

The attorneys at Jakubowski, Robertson, Maffei, Goldsmith & Tartaglia, LLP in St. James, New York work with clients across Long Island to address the financial complications that often accompany divorce. To discuss your legal issues and learn how we can help you, contact us online or call us at 631-360-0400.