What Happens To My 401(k), IRA, Or Pension In A Divorce?
When a marriage dissolves, the complicated process of dividing assets can often make for difficult discussions. When contemplating divorce, it is important to know how assets will be divided and the impact such divisions may have. Some of the assets that are divided include your 401(k), IRA, and pension. In the state of New York, for example, when a divorce is taken to the courts, the method of asset division is known as “equitable distribution.” This method means that property between divorcing spouses will be divided in a way the judge overseeing your case believes is fair, but not necessarily equal. Are you wondering “what happens to my 401(k), IRA, or pension in a divorce?” Don’t worry, we are here to help.
Instead of leaving it up to the courts, spouses have the right to make agreements about how they would like assets divided- provided they are willing to negotiate with one another. Having an experienced matrimonial attorney is crucial when negotiating a divorce settlement agreement and can help avoid disputes or problems down the line. Even if the soon-to-be-ex-spouses can reach an agreement, there will still be the need for a court order, which is known as a Qualified Domestic Relations Order (QDRO). This should be prepared by your attorney.
If an agreement cannot be reached, the legal system will handle the distribution of assets, including retirement assets. In New York, courts generally use what is known as the Majauskas formula to calculate the split. Under this formula, an ex-spouse is provided with one-half of the part of their spouse’s pension earned during the marriage. If a spouse accrued 20 years of service during the marriage and retires with a total of 40 years of service, the ex-spouse will be given 25-percent of the pension.
The Majauskas formula is not the only way to equitably divide retirement savings assets. Courts may also divide assets by awarding one spouse a flat dollar amount or awarding one spouse share calculated as of a specific date. Courts may also factor in the amount of money each spouse earns and the contributory roles each party played during their marriage.
How To Avoid Retirement Fund Losses During A Divorce
While it’s easy enough to split the balance of your checking account, retirement plans aren’t so easy to divide. In all cases, making changes to your retirement accounts in divorce requires filing the proper paperwork, and it’s imperative to work with an attorney who has experience dealing with marital assets. The number one risk of splitting up retirement accounts are taxes and fees, but there are ways to accomplish this without incurring losses.
First, the separation of assets must be clearly spelled out in your divorce decree. Next, you must divide your accounts based on type. For example, qualified plans like 401(k)s and 403(b)s, and pensions are split under a QDRO, which allows you to roll your assets into your own qualified plan, tax, and penalty free. You can also roll 401(k) funds into a traditional or Roth IRA, but this move may not make sense unless you anticipate being in a higher tax bracket later in life, and would, therefore, benefit more from tax-free IRA withdrawals.
Traditional and Roth IRA assets are divided under the “incident to divorce” rules in the tax code, which means that they can be transferred and split between spouses without taxation within one year of the formal divorce date.
In what can be a very difficult time, our experienced matrimonial attorneys at Brian D. Perskin And Associates can help guide you through this complicated process by working to ensure a fair division of your retirement assets.