Division of Pension / Retirement Benefits Upon A Divorce

When spouses in New York State get divorced, all marital assets and liabilities are to be equitably divided, whether by negotiated written settlement agreement of the spouses or by a judgment of the court after a trial.

One of the most valuable assets of a marriage is often the pension and/or retirement benefits accumulated by one or both spouses.  These assets are owned individually by a party, not jointly by the married couple.

Upon a divorce, unless the parties otherwise agree or the Court so orders, each party is usually entitled to 50% of the retirement assets.  When retirement assets are to be divided, with the titled spouse transferring a portion of his/her retirement benefits to the non-titled spouse, the transaction must occur in a prescribed and formalized way to ensure that the transfer does not result in taxable consequences to either party.

In the absence of a divorce, if a retirement account owner withdraws funds from a retirement account, the amount withdrawn is generally treated as taxable income.  Additionally, if the withdrawal is made before the account owner has reached a certain age prescribed by law, the withdrawal is not only treated as taxable income but is also subject to a 10% penalty.

If, however, the withdrawal is (1) a transfer to the other spouse, (2) “incident to” (following) a divorce, and (3) done with the proper paperwork, no taxable event occurs.  That means that the funds transferred to the other spouse are not treated as taxable income and are not subject to a penalty.

The “proper paperwork” is usually a Domestic Relations Order.  This is an Order signed by a New York State Supreme Court Judge, and served upon the retirement plan administrator, that authorizes the transfer.  In some circumstances involving cash accounts (such as an IRA), the transfer may be done either by a Domestic Relations Order or by a Letter of Instruction acceptable to the financial institution transferring the funds.

In either case, an attorney familiar with such transactions should prepare the necessary documents.  The IRS has strict requirements as to the information to be included.

The team of matrimonial attorneys at O’Connell and Aronowitz can guide you through this process.

To learn more about how we can assist you, contact us today.