Division of Retirement Accounts and QDROs

For many people, the most substantial assets they have are their retirement accounts, 401(k)s, IRAs and pensions. People spend a lifetime contributing to these funds and working to build them up so that they have the ability to face their golden years with a sense of financial security and confidence. During the division of property that is part of a divorce, most assets and property that were obtained during the marriage need to be divided. This includes money put into retirement accounts and earned pension benefits.

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How Is Marital Property Divided in a Divorce?

When a couple divorces, funds that are considered marital property or part of the “marital estate” are those that are subject to division. Property acquired before the marriage or inherited may not be part of the marital estate. In some cases, this can become very confusing because a piece of property may have been acquired before a marriage but accrued value during the marriage. For example, equity on a property may have grown during the marriage. In these cases, the value or equity gained during the marriage is part of the marital estate.

The same holds true for retirement accounts. Your divorce attorney will have to establish the initial value of an account prior to the marriage in order to determine what funds constitute property of the marital estate. This procedure is in place to protect those who contributed to the marriage in other ways beyond financial. For instance, stay-at-home moms require the support of primary-breadwinner fathers once the divorce is finalized.

This, however, begs the question: Will extracting the funds from the retirement account subject it to early withdrawal penalties? Not necessarily.

What Is a Qualified Domestic Relations Order (QDRO)?

QDROs are decrees attached to retirement accounts that specify the division of funds in those accounts. The division of retirement accounts can be used for alimony, child support, or relative to an order for the division of property.

In the case of something like a bank account, those funds would be divided in accord with New York State law. However, retirement accounts are trickier because they have early withdrawal penalties which reduces the entire value of the account. Marital decrees don’t have a way of handling this. QDROs do.

A QDRO protects the funds in the retirement account and ensures the equitable distribution of funds once the account matures. You should not assume these funds will be paid out simply because a marital decree says they should. Only a QDRO gives you the certainty you need.

Drafting a QDRO for Your Divorce

For a domestic relations order to be considered qualified, both the court and the plan’s administrator must approve it. Your divorce attorney will draft the language related to the QDRO. This is a tricky process. You need an attorney who understands QDROs and who can preserve your access to the funds once they become available. There are numerous loopholes that can forestall access to those funds or deny it entirely.

Attorneys who are not familiar with QDROs will cost you more money in billable hours and produce inferior results that could leave you vulnerable down the road. At Colwell Law Group, PLLC, we have experience drafting ironclad QDROs and know how to protect your interests after your divorce.

What the Division of Retirement Accounts Should Look Like

New York is an equitable distribution state. This means that marital property may not necessarily be divided 50/50. The court will make a determination based on the earnings of each spouse, their level of education, their capacity for employment, and issues related to their assets. While 50/50 may be the default presumption, in the case that you and your spouse are considering the division of retirement benefits, the spouse with the lower paying job, or no job at all, will receive the majority of assets as part of the divorce decree.

Marital vs. Separate Property

The court also makes a determination as to what constitutes property of the marriage and what property belongs to each individual spouse. Marital property is what’s subject to the division. As stated before, this can become complicated when the IRA or 401(k) predated the marriage but accrued value during the marriage. The value it accrued during the marriage is property of the marital estate and hence subject to the division retirement accounts. Meanwhile, the value it had before the marriage is still property of the retirement account’s owner.

Payments Under a Divided Retirement Account

The plan itself determines how and when payments are made. In some cases, this will be a lump-sum payment at the beneficiary’s retirement age. In other cases, the account will pay periodic sums once it matures.

Lastly, you can extract your share of a retirement account before the account matures, but you will be subject to a 10% tax penalty.

We Can Help You Protect Your Retirement Accounts And Benefits

When a divorce is redefining the future, you need to know that you will still be taken care of and that the resources you have worked so hard to accumulate will still be there to help you as you move on to the next chapter of your life.

We can look at your situation and determine the best approach to ensuring that you will still have what you need and deserve when your divorce is final. Our experience with differentiating marital property from separate property, and our skill in crafting clear and effective QDROs (qualified domestic relations orders) can ensure that you are in the best position possible when it is time to access your retirement accounts and begin collecting pension benefits.

Creating Solutions for a Stable Future

At Colwell Law Group, LLC, in Albany, we have the extensive experience and focus on family law that people need when complex issues such as the division of retirement benefits and accounts happen in a divorce. We know how hard people work to build stable financial situations for their retirement. Our goal is to help you come through your divorce with the ability to look forward to your retirement with the optimism that comes from knowing your finances are in order.

To learn more about how we have been able to help others, please review some of our testimonials.

Division of Retirement Account Attorneys Serving the Capital District and all of Upstate New York

We can help protect the resources you have worked so hard to accumulate so you can have the comfortable retirement you deserve. Let us answer all of your questions about divorce and pensions, retirement accounts and 401(k)s. To schedule a consultation with one of our lawyers, call 518-631-3954, or contact us online.

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