How to Stop an Aggressive Spouse from Liquidating Retirement Accounts Before Filing

The end of a marriage is challenging, but it can be made even more difficult if one spouse seeks to conceal or sell off assets in anticipation of filing for divorce. This spouse may seek to liquidate retirement accounts to unfairly reduce the other spouse’s share in the division of marital property. Retirement accounts are an important asset in most divorces, and liquidating them can negatively impact the financial futures of both spouses.

New York law bars the sale, concealment, or dissipation of assets before a divorce. After filing for divorce, liquidating a retirement account is automatically barred. In response to the liquidation of a retirement account, a court may order a more generous allotment of assets to the other spouse, as well as penalties for contempt. The best action for the other spouse is to gather information and contact an experienced attorney immediately.

Divorces involving the concealment, selling, or dissipation of assets can be challenging for the other spouse. These divorces can easily devolve into high-conflict situations if not addressed early in a way that encourages transparency and fair dealing. While many divorces may look contentious at first, in most cases, the temperature can be turned down once the parties face the reality of the legal system and its likely costs. A more collaborative approach can lead to a much better outcome, emphasizing a carefully thought-out plan for a stable financial future. We would welcome the chance to help you through this process. Feel free to reach out to our team at (914) 738-7766, or visit our contact page to get in touch.

Importance of Retirement Account Division in a Grey Divorce

In a grey divorce, or a divorce occurring after age 50, liquidating retirement accounts is a particularly serious issue. Retirement accounts are an important asset in most grey divorces, often representing decades of saving and investing. People in this demographic are usually in a more stable financial position, but those closer to retirement have less time to fix or make up for mishandling of retirement accounts. If a spouse in a grey divorce liquidates a retirement account, it could profoundly affect both spouses’ ability to retire as planned. Proper handling of 401(k), IRA, or other retirement accounts is critical to avoid taxes and penalties and to preserve financial security.

Legality of the Dissipation of Assets Prior to Divorce

Under New York Domestic Relations Law (DRL) § 236(b)(5)(d), courts may consider the wasteful dissipation of assets when dividing marital property.  This means if one spouse squanders or wrongfully depletes marital assets, the court may award restitution or reduce the dissipating spouse’s share of marital property.  Likewise, Connecticut law allows the court to consider dissipation of assets when determining the equitable division of property.

In view of these laws, any party who seeks to liquidate a retirement account prior to divorce is making a huge error. This attempt to hide or dissipate assets will likely be clear to the court and will compromise that party’s position in a marital settlement. Further, it will cost that party credibility with the court, as will any attempt to hide or conceal financial dealings.

NY Law Automatically Bars Selling or Transferring a Retirement Account After a Divorce Filing

After a divorce filing, New York law provides automatic orders that prevent both parties from selling, transferring, hiding, or dissipating marital assets, without the other party’s written consent. The prohibitions under DRL § 236(B)(2)(b) and court rule 22 NYCRR 202.16-a, arise on the date of filing for the spouse who files and the date of service for the other party. This protection covers all types of retirement accounts, including IRAs, 401(k)s, and other retirement plans. The prohibition would include selling off, transferring, or borrowing against a retirement account. Violating an automatic order is a serious issue that the court would punish severely.

Required Financial Disclosures After Divorce Filing

Because retirement accounts are typically held only in one party’s name, a spouse may have little information regarding the content and transactions in the other party’s accounts. The good news is that immediately after filing for divorce, both spouses must provide a Statement of Net Worth that accurately lists all income, assets, and debts. A misrepresentation or omission on a Statement of Net Worth is a serious mistake because:

• If a spouse fails to provide accurate and complete information or otherwise conceals information, the court can order sanctions or forfeiture under 22 NYCRR 202.
• The Statement of Net Worth is a sworn document, meaning that misrepresentations could lead to a charge of perjury.

Anyone anticipating a divorce should proactively gather and preserve documentation of asset values and any signs of liquidation or concealment by the other party. This includes detailed records from retirement accounts, bank statements, brokerage records, and tax filings from the past five years, which are crucial for establishing evidence in court.

Withdrawing From an IRA or 401K Before Filing for Divorce

While one spouse can withdraw from an IRA or 401(k) before a divorce is filed, doing so can expose the other spouse to several risks and negative consequences, including:

Payment of Early Withdrawal Penalty

If the withdrawing spouse is under the age of 59 ½, the IRS will assess a 10% penalty on top of the federal or state tax liability.

Payment of Federal or State Taxes at a Higher Rate

Withdrawing from a traditional IRA or 401(k) during high-income years can result in a significantly increased tax liability.

Assessment or Sanctions After Filing

In New York, DRL § 236(B)(5)(d)(12) allows courts to consider the “wasteful dissipation of assets” by either spouse as a factor in dividing property. NY courts have multiple tools available to stop wasting or dissipation of assets, including contempt sanctions.

The bottom line is that a spouse who is liquidating IRAs, 401(k)s, or other retirement plans in anticipation of divorce is engaging in risky behavior unlikely to result in any advantage later. Because liquidating retirement accounts is so costly, it would normally be done only in dire financial circumstances. So, liquidating a retirement account without these circumstances is costly and exposes the spouse to reimbursement orders, attorney fees, or contempt charges.

What if Your Spouse Attempts to Liquidate a Retirement Account Despite the Dangers and Cost

We have established that liquidating an IRA, 401(k), or other retirement plan is both costly and highly risky for either party. If your spouse attempts to do so despite the negative consequences:

• Gather information and evidence of the liquidation of the accounts.
• Do not confront your spouse or take any other action before speaking with an attorney.
• Consult an experienced divorce attorney.

Though it may be little consolation to someone going through this situation, misbehavior by spouses anticipating divorce is not unusual. Keep in mind that this misbehavior can be addressed and will not necessarily compromise the other spouse’s position. If you worry about the actions of your spouse in hiding assets or other misbehavior, download our eBook, Common Ways Exes Misbehave.  If you are caught in a divorce with a spouse who feeds on conflict and argument, Divorcing a High Conflict Spouse provides advice and tips. Remember, even in these situations, you can work toward cooperation and a dignified end to your marriage.

How Courts Divide Retirement Accounts

Equitable distribution states like New York and Connecticut divide IRAs, 401(k)s, or other retirement plans fairly but not necessarily equally. As a practical matter, courts will do this in the following way:

• 401(k), 403(b), and Other Employer-Sponsored Plans

The court will enter a Qualified Domestic Relations Order, or QDRO, which instructs the plan administrator to transfer a portion of one spouse’s account to the other spouse’s account. The spouse receiving the funds may then transfer funds to an IRA or keep them in a separate plan.

• Traditional or Roth IRAs:

IRAs are typically divided through a transfer by the sending IRA custodian to the receiving IRA custodian to avoid immediate taxes. When this transfer is done properly, no taxes are due on the transfer, although future distributions are still taxable within the terms of the plan (traditional or Roth).

While these are the mechanisms by which these retirement accounts may be divided, keep in mind that the parties may agree to divide all marital assets in other ways. It is wise to always consider the future and the big picture in any division of assets. One party may walk away with a greater share of the retirement account in exchange for another asset.

Why Negotiating a Fair Division of Retirement Accounts is a Better Alternative

Because dividing retirement accounts can be so costly when done wrong, negotiation is nearly always a better alternative. Collaborative divorce often leads to a fairer division of assets than a court proceeding because:

• Negotiation allows each spouse to discuss their needs and preferences regarding retirement account division and other property division issues.
• The process emphasizes cooperation instead of conflict and helps the parties find areas where they can agree. It also helps the parties work towards a mutual agreement on more divisive issues.
• Collaborative divorce can help the parties preserve a working relationship, which is critical for co-parenting or for harmony with friends and extended family.

After the parties make the required comprehensive financial disclosures, the negotiation can begin with a complete understanding of marital assets. The parties can rely on legal counsel and other financial experts for advice and insights into taxation and long-term financial planning. The goal of this process is not simply a fair division today, but future financial stability and security.

If you are concerned about the fair distribution of assets in your divorce or how you can structure the distribution for your situation and future, let’s sit down and discuss these issues. Feel free to reach out to our team at (914) 738-7766 or visit our contact page to get in touch.