How to Split IRAs During a Divorce in NY

Dividing marital assets in a divorce settlement is never easy. This is especially true when retirement accounts, such as IRAs, are involved. These retirement accounts are generally created over many years to ensure retirement benefits in the future. Because these can be some of the most significant assets in a marital estate, splitting retirement accounts and other assets can be very contentious and difficult.

New York follows an equitable distribution rule, which means that assets acquired during a marriage are fairly divided. This fair distribution, however, doesn't mean 50/50. Individual retirement accounts are subject to division in New York State, but because there are potential tax implications, penalties, and other issues associated with these accounts, it can get very complicated, very quickly. There are ways, however, to get a favorable outcome instead of unintended consequences.

A New York divorce attorney can help when it comes to splitting retirement accounts, and they will do their best to ensure that everything is fair between their client and the ex-spouse. They can help with questions like how is a trust handled in a divorce in NY?

Are IRAs Marital Property in New York?

Before getting into splitting an IRA, it's important to understand if it's marital property or not. In New York, marital property includes any asset that is acquired by either spouse during the marriage. This typically includes retirement accounts. Separate property includes assets that are acquired before the marriage or through an inheritance that is only meant for that person.

If an IRA was funded before the marriage, the portion that was funded before the marriage is usually considered to be separate property. If contributions were made during the marriage, and the IRA grew in value, they are considered to be marital property and will be included in property division.

In many cases, an IRA has both of these components, which means many people may be involved in determining how the account is split.

What Makes Splitting IRAs Different?

Splitting retirement accounts during a divorce isn't as easy as writing a check or transferring funds. IRAs must follow IRS rules, and not doing the process in the correct way can lead to early withdrawal penalties if the owner is younger than 59 1/2 and income tax liabilities for both people.

Other plans, like a 401(k), requires a Qualified Domestic Relations Order, or QDRO, to be divided. IRAs do not. Instead, they require a transfer incident to divorce, which must be done correctly. A tax professional can be used for tax advice in this instance. No one wants to pay taxes they don't want to pay, nor deal with tax consequences on top of dealing with a divorce.

Steps to Split an IRA During Divorce in NY

Here is the typical process to safely and legally divided an IRA in New York State:

Identify the IRA Accounts

The first step is to identify any IRA owned by either spouse. These might include a traditional IRA, a Roth IRA, a SEP IRA or other IRA account. Each type of account has different tax consequences, so its important to understand this.

Determine the Marital Portion

Only the part of the IRA that was funded during the marriage is considered a marital asset. An accountant or tax attorney may need to look into every IRA account to trace contributions. They will also look at how the IRA grew during the marriage to determine what is considered marital property.

Include the IRA in the Settlement or Court Order

The IRA must be included in the settlement or court order, and it must include the following:

• The dollar amount the be transferred

• The name of the receiving spouse

• The type of IRA being divided

Execute a Transfer Incident to Divorce

A transfer incident to divorce is the IRS-approved way to transfer an IRA from one spouse to another. The transfer must be made following the settlement, and the IRA custodian must receive a copy of the court order. Finally, the funds must go directly into either a new or existing IRA through a direct transfer.

Update Beneficiary Designations

After the IRA is split, it's important that both spouses update the IRA beneficiaries. Even with a divorce decree, if a former spouse is still listed as the beneficiary, this can cause long term implications. It should also be done on other accounts like life insurance policies or other marital assets during the divorce process.

Tax Implications of Splitting IRAs

If done correctly, a transfer incident to divorce is not taxable. However, there are some things to keep in mind about taxes. The recipient spouse will owe taxes on any withdrawals at the ordinary income tax rate. The transferring spouse will not own any taxes or penalties as long as the transfer is done correctly.

Special Rules for Roth IRAs

There are some special rules for Roth IRAs because they are funded with after-tax dollars. This means that any qualified withdrawals are tax-free, too. However, they still require a transfer incident to divorce.

Can a Court Force a Person to Split an IRA?

Yes. If the IRA, or part of the IRA, is considered to be marital property, and part of the divorce agreement, a court can force the person who owns the IRA to split it with their ex. The court may force a specific amount or a percentage of the account, to the non-owner spouse.

If the IRA is not easily divided, the court can order a payment from the IRA owner to their ex-spouse to cover an equitable amount. The court can also consider the value of the spouse's IRA when distributing assets to the other spouse during the divorce proceeding.

What If the IRA Holder Refuses to Cooperate?

If the IRA owner refuses to transfer IRA funds following the divorce process, a family law firm in Albany can file a motion to enforce the divorce order. This is a legal document to ensure the IRA accountholder complies. if they still don't comply, they could be fined or be penalized in other ways.

How a Divorce Attorney Can Help Split IRAs During a Divorce

Splitting retirement assets during a divorce can be a confusing time. IRA assets can be even more confusing as there are tax consequences if the process is done incorrectly, and it can affect a person's financial interests now and financial goals for the future. Divorce and Family Legal, LLC can also assist with questions like do I have to return my wedding rings after a divorce in NY?

For those who are looking for representation in a divorce who understands the methods associated with splitting an IRA, Divorce and Family Legal, LLC is an Albany law firm ready to help. Call for more information.