How divorce affects 401(k) plans

There is no getting around the emotional toll divorce can take on an individual. But at some point, divorcing parties in New York will need to set aside their emotions and come up with a property division agreement that suits them both. This agreement will include 401(k) and other retirement plans.

Family law regulations introduce several factors that will determine how divorcing couples will split a 401(k) plan. These include the balance of the retirement plan, where the couple calls home, taxes paid on the retirement plan and the other marital assets included in the division.

New York is an equitable distribution state. This fact means that divorcing parties are to divide property in a way that the court considers fair to both sides. Before the divorcing parties can know the particulars regarding the division of a 401(k) plan, it is necessary to establish the value of the plan. Requesting a summary plan description can accomplish this step in the process. Divorcees should also reach out to an administrator to learn about any rules regarding the division of the assets.

It is common for divorcing couples who have similar amounts of retirement money in a 401(k) plan to move forward with their plans. However, things can become more complicated when one spouse possesses significantly more in a retirement plan than the other.

Dividing 401(k) assets involves a little more than just taking the sum of retirement savings and dividing by two. Tax deferments are part of traditional 401(k) plans. This fact makes it necessary for the plan beneficiary to pay taxes on distributions. Conversely, the funding of a Roth plan happens after income is taxed, so there is no future tax responsibility.

Preventing losses

It is important for divorcing parties to remember that the goal is to save on taxes and fees when dividing property. A failure to do so can hurt both parties by setting them back years with their retirement plans. Divorce lawyers can help with crafting an agreement, but the parties have to be willing to work together.

A divorce is always hard on both parties. However, divorcing couples that work toward a smooth process can get on with the business of rebuilding their lives sooner rather than later. Individuals involved with the divorce process may produce a better outcome for themselves by consulting with an attorney who is experienced in family law.