When you and your spouse file for divorce, there will be a considerable amount of paperwork you must file. However, one aspect of divorce that many are unfamiliar with is what will happen to their retirement accounts. Many believe that because the retirement account is in one name only, that is it not subject to division during the divorce. However, this is far from the truth. Additionally, because these accounts typically incur steep tax penalties when they are withdrawn before retirement, special paperwork is required to ensure that the recipient spouse can obtain the funds they are entitled to. As such, a Qualified Domestic Relations Order (QDRO) is drafted. If you’re unfamiliar with this document or how it works, you’ll want to keep reading. In addition, you’ll discover the importance of discussing your circumstances with Long Island property division lawyers.
What Is a Qualified Domestic Relations Order?
When you and your spouse decide to file for divorce, it’s imperative to understand what you can expect during this process. Typically, you’ll find that among determining matters like alimonyr and child support, any assets jointly owned or deemed marital property will be subject to division. One such asset that is subject to division is your retirement plan.
First and foremost, it’s important to understand how a retirement account is considered marital property. Generally, a marital asset is anything obtained during the course of your marriage, or that is co-mingled with other martial assets. As such, despite the fact that the retirement account is in your name, you’ll find that because you contributed to the account while married, it is consited a joint asset. As such, the amount of savings that you accrued during your marriage will be subject to division.
However, any early withdrawal of funds from a retirement account are subject to a considerable 10% tax. As such, a QDRO allows you to make an early withdrawal as part of your divorce without incurring this penalty.
You should note, however, that only certain accounts require a QDRO. Typically, this includes any retirement account covered by the Employee Retirement Income Security Act, like a 401(K). As such, if you have an IRA, this will be treated like any other marital asset during your divorce.
How Do These Work?
In order for a QDRO to be legally valid, it must contain important information like the name of both parties, their last known mailing addresses, the dollar amount or percentage to be paid to the recipient party, and the number of payments that will occur. In addition, there may be stipulations included to cover events like paying or recieing spouse’s passing or how to proceed in the event the retirement plan stops.
However, when you and your spouse divorce, the court will examine the retirement account to determine how much was contributed over the course of your marriage. For example, if you have $100,000 in the account at the time of your divorce, you may have had $40,000 saved at the time of your marriage. As such, the $60,000 you accrued will be subject to division during your divorce under the equitable distribution method that New York state adheres to. However, you and your spouse may be able to negotiate an agreement as to how you would like to divide these assets.
As mentioned, you can avoid the 10% tax penalty that typically accompanies an early withdrawal from a retirement account by utilizing a QDRO. However, the money must be placed into a retirement account. If the funds are not placed in a retirement account, they will be subject to the tax.
Creating a QDRO can be incredibly complicated, which is why it’s in your best interest to contact an experienced attorney with Sklavos Law Firm. If you are going through a divore, contact us today to learn how we can assist you in these matters.
