Going through a divorce is an incredibly difficult period, not only because of the emotional impact this process undoubtedly carries, but also because of the many financial and legal matters that arise during this process. As such, one matter you may not have considered is how to divide the assets held in a retirement account. Though it may seem as simple as making a withdrawal, it’s imperative to remember that you can face tax penalties. Luckily, you may be able to utilize a Qualified Domestic Relations Order (QDRO) during these matters. If you’re unsure what this is or what retirement accounts can benefit from this document, you’ll want to keep reading. The following blog explores what you should know, as well as the importance of working with an experienced Nassau County property distribution attorney to guide you through these matters.
What Is a Qualified Domestic Relations Order?
A qualified domestic relations order (QDRO) is a court order that allows for the early withdrawal of retirement funds during a divorce. When you go through a divorce in New York, all marital assets will be subject to division under the state’s equitable distribution law. This means that assets will be distributed based on each spouse’s contribution to the marriage rather than an automatic even split. However, while they are generally considered marital property, retirement accounts are not easily divided.
As such, the judge can order a QDRO to make the division of these assets simpler. Generally, when you withdraw funds from a retirement account before age 59 and 1/2, you will face a hefty 10% tax penalty on the funds removed from the account. However, a QDRO is a court order that essentially allows you to withdraw these funds to give to your spouse as part of your divorce without facing tax penalties.
It is critical to understand that in order for a QDRO to waive the tax penalties, the funds must be deposited into a retirement account.
What Kind of Retirement Accounts Are Included?
It’s imperative to understand that only certain retirement accounts are protected under the Employee Retirement Income Security Act (ERISA). These generally include employee-sponsored plans, like 401(k)s, 403(b)s, profit share plans, 457s, and employee stock ownership plans.
However, there are also a number of retirement accounts that are not “qualified,” meaning they cannot be divided using a QDRO. This generally includes Individual Retirement Accounts (IRAs), deferred annuities, and military pension plans. As such, these assets can be divided like any other marital property, meaning you may incur a tax penalty. However, there are methods used to divide these accounts to avoid the tax penalties, so it’s in your best interest to discuss these options with your attorney.
If you are going through a divorce and you need assistance in navigating the complexities of dividing a retirement account during divorce, the team at Barrows Levy, PLLC, is here to assist. We understand how difficult these matters can be, which is why we are committed to fighting for you through these difficult times. When you need help, our team is here. Contact us today to learn how we can help you recover the funds you deserve.
