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How to divide retirement accounts in a divorce

On Behalf of | Mar 15, 2021 | Blog, Divorce

In the state of New York, joint assets are divided in an equitable fashion when a marriage is dissolved. In most cases, a retirement account will be considered a joint asset even if your spouse’s name was not on it. Let’s take a look at what you need to know about properly dividing an IRA, 401(k) or similar asset in a divorce settlement.

How to properly divide an IRA

To avoid triggering a taxable event, it’s important that you don’t withdraw funds from an IRA without a court order. Otherwise, you could be required to pay income tax on any money that is taken out of the account. Furthermore, you could be subject to a 10% early withdrawal fee. Ideally, any funds that are taken out of your account will be transferred directly to a new IRA in your spouse’s name.

How to properly divide a 401(k)

A 401(k) can only be divided per the terms of a qualified domestic relations order (QDRO). In most cases, a percentage of the account is transferred directly into an IRA held by the recipient spouse. If the recipient spouse chooses to take a lump sum payment instead, that person will need to pay income taxes on the amount that he or she receives. However, there is no need to pay a 10% early withdrawal penalty.

If you are going through a divorce, it’s generally in your best interest to have an attorney review a settlement before it goes into effect. Doing so may help to avoid triggering taxable events that might reduce the value of any assets that you receive. An attorney may also be able to determine if a proposed settlement truly represents an equitable distribution of joint assets.