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Dividing retirement accounts in divorce

On Behalf of | Oct 29, 2021 | Property Division

New York law requires divorcing couples to divide their marital property in a way that meets standards of fairness under state law. These assets can include everything from household furniture to complex investments, and more.

Dividing some types of property is relatively straightforward. Even an asset as valuable as the family home can be divided if one spouse buys out the other’s share, or if they sell the property and divide the proceeds. But some other types of assets are much more difficult to dissolve. Among the most complicated are retirement accounts.

Penalty for early withdrawal

A retirement account may be in the name of only one spouse, but if the account continued to gain value during the marriage, a court will most likely consider it part of the marital property to be divided in divorce. If it were a typical bank account, the parties could just withdraw the money and split it between them according to whatever division they agreed upon, but a retirement account is not a typical bank account. For most such accounts, the financial institution exacts a hefty penalty for early withdrawal. On top of that, the owner will have to pay taxes on the account if they withdraw before retirement. The result can devastate the value of the account.

To get around this problem, New York courts can issue something known as a Domestic Relations Order, sometimes known as a Qualified Domestic Relations Order, or QDRO. This is a court order that assigns a specified amount of the retirement account to an “alternate payee” — in most cases, an ex-spouse. The exact terms can vary from case to case, but generally, once the parties reach retirement age, they can withdraw from the account without penalty.

Customize your order

This has been a very basic introduction to QDROs, There are many requirements for these orders, and many ways to customize them to fit specific situations and needs.

For many people going through a divorce, retirement accounts are among the most valuable assets in the marital property. It’s important to divide them properly, in a way that respects both parties’ rights.