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Splitting retirement accounts in divorce

| Dec 14, 2020 | Firm News |

The end of a marriage may be a very emotional time, but the divorce process itself is largely about money. The division of property is often the most time-consuming and complicated part of any divorce.

New York law calls for the equitable distribution of marital property in divorce. This does not necessarily mean a 50-50 split. When deciding on property division, the courts look at the totality of the financial circumstances and, following state guidelines, arrive at a distribution that they believe is fair.

However, in most cases it is the parties themselves who decide on the division of property. First, they must list all their assets and separate their personal property from the marital property. Generally, marital property consists of assets acquired during the marriage, while separate property consists of assets acquired before the marriage, but some types of assets are exceptions. To reach a fair division, the parties have to take into account the earning potential of each ex-spouse and other concerns.

Complex assets

Since it’s usually the parties themselves who are deciding how to divide their marital property, this means the property division process consists of long and sometimes complex negotiations over how to split the assets.

For some types of assets, this can be relatively straightforward.  For example, the spouses can split a joint checking account down the middle, with each taking half.  Assuming each ex-spouse has roughly equal earning potential, this can be a fair division. Likewise, a family home owned in both parties’ names can be sold, with each party taking half the proceeds. Alternatively, one party can buy out the other’s share.

But for some complex assets, the division process can be technically difficult. If not handled property, the division of complex assets can lead to big problems, including tax issues and fines. Some of the most difficult issues involve assets that cannot yet be sold or withdrawn without losing significant value. One such asset is a retirement account.

Penalty for early withdrawal

For many Americans, a 401(K) or other retirement account represents a significant part of their net worth. Many retirement accounts are tied to a person’s employment, and cannot be withdrawn before retirement without incurring a steep financial penalty.

However, if the account increased in value during the marriage, that added value is typically considered part of the marital property, and so the worker’s spouse should receive part of it in a divorce. How can the parties divide the value without withdrawing from the account?

One solution

New York allows divorcing couples to get around this problem with something called a Domestic Relations Order, or DRO. This order instructs the manager of a pension plan or other qualifying retirement account to provide a share of the account to the holder’s ex-spouse when the holder retires.

Domestic relations orders can be complicated, and they don’t work with every type of account. It is important to seek out help from an experienced attorney before trying to divide a retirement account in divorce.