The property division phase of a divorce can be complicated and frustrating. You may understand how to divide assets such as the contents of your checking and savings accounts, but what about your retirement accounts?
Good question. It turns out that the rules are different for different kinds of accounts.
New York is an equitable distribution state. Therefore, with respect to the fair distribution of assets, including retirement accounts, the court will take certain factors into consideration, such as the length of the marriage, the earning power of the parties and each person’s financial state.
QDRO and your 401(k)
The purpose of the Qualified Domestic Relations Order, or QDRO, is to ensure the correct distribution of funds in your 401(k). This legal document confirms that each party is eligible to receive a certain portion of those funds. If you or your spouse have pensions or other employer-sponsored plans, each will need to have a separate QDRO.
The transfer incident and your IRA
The funds in individual retirement accounts, or IRAs, must have a “transfer incident to divorce.” This refers to the tax-free movement of funds. Depending on the wording of your divorce decree, the IRS custodian will label the movement either as a transfer of funds or a rollover.
You will also have to give thought to tax consequences. For example, you make pre-tax contributions to your 401(k) and traditional IRA, but you make contributions to a Roth IRA after you pay income tax. You will want to keep in mind that taking funds out of certain types of retirement accounts will have tax implications.
There are several ways to receive retirement fund distributions in your divorce. You can roll the funds you receive into your own retirement plan. You can also defer taking a distribution from your spouse’s retirement account until he or she retires or simply cash out your share of the funds.