Dividing a pension during divorce? Don’t get slammed with taxes

In New York, “marital property” encompasses far more than just the family house, the cars and the china dishes you received as a wedding present. It includes nearly all assets that were accumulated during the marriage – which means that pensions and retirement accounts are fair game in the property division process.

However, if you simply cash out a 401(k) and split the money, you will face a very hefty tax penalty. The penalty is usually 10 percent (unless you are over age 59 and a half). Plus, the IRS will count the money you receive from the retirement account as income, which may place you in a much higher income-tax bracket at the end of the year. All in all, you stand to lose a very significant amount.

Here’s the good news: A Qualified Domestic Relations Order (QDRO) can allow you to transfer pensions and other retirement funds to your ex-spouse without triggering tax penalties.

According to the New York Office of the State Comptroller, a QDRO is a type of domestic relations order (DRO) that is issued by the courts. It clearly states how retirement benefits should be allocated between divorcing spouses. It can also allow an ex-spouse to become the beneficiary of pre- or post-retirement death benefits.

In most cases, the courts will give the ex-spouse half of the amount that was earned during the marriage. This means that if you were married 10 years and the value of your pension increased by $50,000 during that decade, your ex-spouse will likely be eligible to receive $25,000.

(Note: your ex-spouse is not able to leave his or her share of the pension to anyone else. It can’t be passed along to descendents through a will, for instance. Likewise, your ex-spouse won’t begin receiving any benefits until you actually retire and begin receiving those benefits yourself.)

Because QDROs/DROs are so important to your financial future, it makes sense to consult a legal professional – preferably a divorce lawyer with in-depth experience in complex financial matters. An attorney like this will be able to help you protect your interests at every step of the marital property division process.