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When dealing with a divorce, especially one that is not amicable, the natural instinct of any spouse is to try to protect their financial interests from their former spouse.
Suddenly, the lines between marital property and separate assets become blurred. Being forced into dividing retirement accounts, such as a 401(K), many years before reaching the required age will now become a possibility.
With it comes the threat of being charged income taxes as the common penalty for individuals who withdraw funds from their retirement accounts too early.
Such a situation can easily lead to many unplanned costs and the disruption of a retirement plan that was well on its way to maturity. However, with a good team of attorneys, such as Divorce & Family Legal, all of that can be averted.
Any divorcing couple asking, "What happens to 401K in divorce in NY?" can call right now and get the answer from the best legal minds in Albany. Our team is able to explain how to split 401k in divorce in NY as well.
Marital Assets or Separate Property - Defining a 401(K)
The first step to the equitable distribution of a 401(K) retirement account is to decide whether it can be considered marital property or should remain separate property.
In general, unless otherwise overruled by a prenuptial agreement, any contributions made before marriage and after divorce are separate property. It cannot be lumped together with other marital funds when calculating how much each spouse will get.
On the other hand, all contributions that were made to the retirement account while the couple was married will be subject to equitable distribution along with other marital assets.
In theory, this should clarify things when dealing with a 401(K) account, but in reality, a good lawyer is still required to help both parties reach a settlement agreement.
Five Options for Divorcing Couples With a 401(K)
There are many different ways to handle a retirement account during the equitable distribution of marital assets.
The following are five common options used by other New York divorce applicants:
Filing for a Qualified Domestic Relations Order (QDRO)
A non-employee spouse can file for a qualified domestic relations order (QDRO) to be granted their marital portion of the 401(K) retirement account.
The QDRO will be granted once approval has been obtained from the other spouse, the divorce attorney, the plan administrator, and the judge.
With a QDRO, the other spouse's contributions during the marriage will be calculated, and the receiving spouse will become an alternate payee of the 401(K) retirement plan.
Buying Out One Spouse
If one spouse has other assets of equal value that they can award to their former partner, dividing retirement accounts can be avoided. Cash compensation can also be used to buy out one partner and leave the other as the sole beneficiary.
By choosing the buy-out option, divorcing couples can avoid resorting to a QDRO, which can take many months or even years to be finalized.
A quick and amicable split can, therefore, be achieved while avoiding the possibility of paying income taxes on the 401(K) retirement account.
Keeping the Retirement Account Intact
In some situations, the court may decide that the best way forward is to keep the retirement account intact.
This is usually the case when the account is too small to be divided. Also, the court may decide that it is better to divide other assets to achieve equitable distribution.
Opting for Deferred Distribution
Another option for New York divorce applicants is to choose deferred distribution of their 401(K) retirement account.
Such an option is great when both parties wish to avoid having to pay taxes and early withdrawal penalties by sharing the retirement funds.
However, deferred distribution can be a lot more complicated than all other options because it means the account activity will have to be monitored until the primary beneficiary reaches retirement age and is now ready to make tax-free withdrawals from their 401(K).
Conducting a 401(K) Rollover
Finally, the receiving spouse can choose to rollover their lump sum of cash into another type of retirement account. This will help them avoid incurring IRS penalties for early withdrawal.
A 401(K) rollover does, however, come with its own set of rules and regulations that will need to be considered.
An example is the rule that any money rolled over from a 401(K) cannot be allowed to sit in the recipient’s bank account for more than 60 days. If it does, it will be regarded as an early distribution and be subject to taxation. For more information, a divorce law firm may be able to help.
Tax Implications of a 401(K) Split and Distribution
Considering that the IRS can penalize early withdrawals by up to 20%, the issues of penalties and tax implications should be foremost in the minds of New York divorce applicants with a 401(K) retirement account to divide.
With an experienced attorney handling the equitable distribution of marital assets, both spouses can be helped to make informed decisions and reach a favorable outcome.
Generally, the person who decides to withdraw funds from the 401(K) of their ex-spouse into a separate account will be responsible for paying any taxes that arise. The only exception is if the funds are being withdrawn after obtaining a QDRO.
How Can a Divorce Attorney Help?
Many legal requirements need to be fulfilled when applying for a New York divorce. A good attorney can help in a variety of ways, such as:
Legal representation during the divorce process
Financial knowledge regarding 401(K) splits
QDRO preparation and filing
Designing and implementing strategies
Understanding New York divorce laws
Handling post-divorce considerations
Divorce & Family Legal - The Go-to Attorneys for New York Divorce Cases
The New York divorce process can be very complicated, even before considering the equitable distribution of retirement funds.
With regards to a 401(K) account, divorcing couples have various options to choose from. It is not always the case that the retirement portfolio has to be split. An experienced attorney can assist in exploring other viable options.
Divorce & Family Legal is one of the top-rated divorce law firms in New York. Located in Albany, its doors are always open for couples who wish to have a free consultation regarding the various factors that will affect the distribution of funds in a 401(K) after a divorce.