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Divorce may trigger 401(k) distributions

On Behalf of | Nov 10, 2020 | High Net-Worth Divorce

The assets acquired during a marriage mostly are the equal property of both spouses. This is true of 401(k) retirement accounts even when only one spouse works. New York is a marital law state that requires an equitable distribution of financial and real property assets when a marriage ends in divorce. That does not necessarily mean you have to cash out all your 401(k) accounts, though.

Only assets accrued during marriage count

New York family law says only the assets that are obtained during the marriage count as marital property that are subject to equitable distribution. Any funds you deposited into a 401(k) and its value at the time the marriage occurred belong to you. The same is true for any real property and other assets. Once you are married, any assets or property acquired are marital property right up until the point both parties file for divorce.

Not a 50/50 split

A marital law state does not automatically give each spouse half of all the marriage assets via the division of assets. Only an equitable distribution is required, so a divorcing spouse will not necessarily get half of a 401(k) account. Only an equitable amount that helps someone maintain a relatively stable standard of living after divorcing would apply. If both spouses are roughly equal in earnings capacity and assets holdings, there may be no need to distribute any funds from a 401(k) or other assets.

Taxes and withdrawal penalties may apply

When a partial or full distribution of a 401(k) plan occurs to satisfy an agreement pertaining to the distribution of assets during a divorce, early withdrawal penalties and federal and state taxes may reduce the amount that is available. In many cases, it is better to negotiate the distribution of assets that leave 401(k) accounts and other property intact to prevent unneeded reductions. An experienced family law attorney can help you understand how state marital law could affect your accounts and help you present the most equitable distribution.

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