Protecting Your 401k in a Divorce

Experienced Chester, New York family lawyer helps protect your retirement savings

Divorce can create a great deal of uncertainty for your future, right up to your retirement. The best retirement protection comes from preplanning. If you are about to be married and want to know how to protect a 401(k) in divorce, I can provide practical advice and draft a prenuptial agreement that secures your savings. However, if you’re already married and heading for divorce, your 401(k) — like any other marital asset — will be subject to division under New York’s equitable distribution law. At Meth Law Offices, PC, I offer personalized counsel focused on delivering the best outcome possible to protect your fair share.

Who gets the 401(k) in a New York divorce?

Many factors go into determining the disposition of retirement funds in divorce. Under New York law, a dependent spouse has an equitable interest in the other spouse’s retirement savings, including a pension, an IRA or a 401(k). However, the proportion a dependent spouse can claim depends on many factors, such as the length of time that the plan was in effect during the marriage. A spouse does not have an equitable claim to funds accrued before the marriage or after the divorce is finalized.

One spouse’s equitable claim to the other spouse’s 401(k) also depends on whether he or she has her own retirement account. For two-career couples, the easiest solution could be to keep their own plans intact. Any inequity can be balanced in the distribution of other property.

State laws and plan rules dictate 401(k) ownership in divorce

In a divorce, state law dictates who owns how much of a retirement fund and how those assets can be distributed. To distribute assets from a 401(k), you basically have three options:

  • Rollover — The spouse taking a distribution rolls the funds into an existing 401(k). This avoids any taxation or penalty.
  • Deferred payment — The recipient spouse waits until the other spouse retires, then receives regular payments or a lump sum settlement.
  • Cash out — The recipient spouse takes a cash payment from the 401(k). There is a 10 percent penalty and tax due for such a withdrawal before age 59 ½.

However, a court cannot require distribution of benefits in contravention of the 401(k) plan’s rules for accrual and valuation. If neither spouse is ready to retire and there are sufficient other funds held by the spouses, a Chester, New York divorce lawyer can help reach a cash settlement paid in part from the other assets.

How a QDRO impacts retirement plans

A qualified domestic relations order (QDRO) is a court order that authorizes a spouse to receive a portion of a retirement account. There is no penalty or tax due, because funds have not technically been distributed. Spouses now have their own accounts, to which they can contribute. Getting a QDRO can take time, so any agreement authorizing the split must contain instructions on dealing with appreciation or depreciation of account assets in the interim.

How are pensions handled in a New York divorce?

Pension funds generally are subject to the same rules for dividing assets as other retirement funds. For a military pension, however, the court follows the “10/10 rule.” The service member must have at least 10 years of service to qualify for a pension and the marriage must have lasted for at least 10 years of service for the spouse to have an equitable interest.

To learn more, contact a Chester, New York divorce lawyer for a free initial consultation

Meth Law Offices, PC protects clients’ 401(k)s and other retirement accounts during divorce in Chester and throughout Orange County. Please call 845-610-6595 or contact me online for a free initial consultation.