In New York, retirement accounts are subject to laws and regulations that can complicate asset division. Divorcing couples in New York should familiarize themselves with how marital and individual retirement accounts are treated, the steps involved in dividing 401(k) and IRA assets, and the role of a Qualified Domestic Relations Order (QDRO) in ensuring proper division.
Marital Assets and IRA Accounts
New York divorce courts divide marital property using the equitable distribution approach, which means courts divide the property fairly, but not necessarily equally. An important part of this distribution is determining marital property versus separate property.
What Makes an IRA Marital Property?
An Individual Retirement Account (IRA) is considered marital property if contributions were made during the marriage. This includes both traditional IRAs and Roth IRAs. If the account existed before the marriage, the portion of the account that has grown in value since the marriage may be subject to division.
For instance, if one spouse had an IRA worth $30,000 when they married, and it grew to $50,000 during the marriage, the $20,000 increase in value may be considered marital property. The court may divide that $20,000 between the spouses, while the $30,000 that existed before the marriage is treated as the separate property of the spouse who owned the account.
Tips for Dividing IRAs:
- Valuation: When dividing an IRA, both spouses should get the account properly valued. Your New York divorce lawyer can put you in touch with a financial expert to help determine how much of the IRA is marital property.
- Transfer Process: IRAs can be transferred directly between spouses without incurring taxes, provided the transfer is done in accordance with IRS guidelines. This can help avoid unnecessary tax penalties.
Marital Assets and Employer-Sponsored Retirement Accounts
Employer-sponsored retirement accounts, like 401(k)s, are also treated as marital property if contributions were made during the marriage. However, these accounts can present unique challenges because they are often larger and more complex than individual IRAs.
The Role of the 401(k) in Divorce
Similar to IRAs, 401(k)s established or funded during the marriage are subject to equitable distribution. This includes the contributions made by both spouses, any employer matches, and the earnings on those contributions.
However, 401(k)s differ from IRAs in that they are often governed by the Employee Retirement Income Security Act (ERISA), which imposes specific rules and procedures for dividing the accounts in a divorce.
For example, if a couple was married for 15 years and one spouse had a 401(k) from his employer worth $200,000 at the time of the divorce (which included his contributions and his employer’s matching contributions), the entire account balance could be considered marital property.
The division could be 50/50, or the court might award the non-holding spouse a larger share, depending on factors like the length of the marriage, each spouse’s financial needs, and contributions to the household.
Tips for Dividing 401(k)s in Divorce:
- QDRO: A Qualified Domestic Relations Order (QDRO) is needed to divide a 401(k) without triggering tax penalties. The QDRO is a legal document that instructs the plan administrator to divide the account and distribute a portion to the non-employee spouse.
- Understand Vesting: If the 401(k) has employer-matching contributions, it’s important to understand whether those contributions are vested. A vested account balance means the non-employee spouse can claim it as part of their share of marital property.
- Consider a Cash-Out: Some spouses may choose to have their share of the 401(k) account paid out in cash instead of rolling it over into their own retirement account. However, this may trigger taxes and penalties, so it should be carefully considered.
What is a Qualified Domestic Relations Order (QDRO)?
A QDRO is a court order that allows employer-sponsored retirement plans to be divided between divorcing spouses. Without a QDRO, the non-employee spouse cannot access their portion of the 401(k) without incurring taxes and penalties. QDROs must be approved by the plan administrator before they can be enforced.
How Does a QDRO Work?
Once the court issues the QDRO, the retirement plan administrator will execute the order, transferring the designated portion of the 401(k) to the non-employee spouse’s own retirement account. This transfer is not subject to taxes or penalties as long as it is handled directly between the accounts.
Tips for the QDRO Process:
- Plan Requirements: Each 401(k) plan may have different requirements for a QDRO. It’s important to consult with the plan administrator early in the process to understand any specific documentation or language needed.
- Tax Implications: The QDRO itself allows for a tax-free transfer, but once the non-employee spouse withdraws the funds, taxes may apply depending on the type of account and withdrawal.
- Legal Assistance: The QDRO process can be complicated, so it is advisable to work with a New York divorce attorney or financial expert who specializes in divorce and retirement assets to ensure compliance.
Children as Payees
In some cases, children may be designated as payees for a portion of the retirement accounts in a divorce. This is more common when the child is a minor or when both parents have agreed to allocate certain assets to the child as part of the overall divorce settlement.
Why Children May Be Named Payees
The court may order that a portion of the marital retirement assets be placed in a trust or custodial account for the children. This can be part of a broader child support or custody arrangement, where one parent agrees to allocate certain funds for the children’s future expenses, such as education or healthcare.
Tips for Children as Payees:
- Trusts and Custodial Accounts: Setting up a trust or custodial account for the children’s benefit is a good way to ensure that the funds are protected until they reach adulthood. The court may specify how the funds are to be managed and distributed.
- Tax Considerations: When children are named as payees for a retirement account, the tax implications should be carefully considered. Depending on the type of account and how the funds are distributed, there could be tax consequences that affect both the children and the parent making the contribution.
In a New York divorce, the division of 401(k)s, IRAs, and other retirement assets requires careful attention to both state and federal laws. Divorcees should consult with an experienced New York divorce attorney skilled in handling these accounts to ensure that all aspects of retirement accounts are handled in compliance with the law.