5 FAQs About Dividing Retirement Accounts in an Illinois Divorce

1. How is retirement split in divorce in Illinois?

Retirement accounts contributed to during a marriage do not belong to only one party. Rather, they are considered marital property that will have to be divided equitably in a divorce.

To divide retirement accounts in a divorce proceeding, Judges enter a Qualified Domestic Relations Order (or a “QDRO”) to do so. A QDRO allows the transfer of a portion of one 401(k) account into a separate retirement account established by the other party. Using the QDRO allows the typical 10% penalty for an early withdrawal to be waived. Alternatively, suppose the other party opts for a lump sum payment from the other party’s 401(k) account. In that case, the person receiving the funds as cash will have to pay the required taxes on the disbursement at the rate associated with their income tax bracket.

2. Do I have to give my wife/husband half of my retirement?

Illinois differentiates between marital and non-marital property in the division of assets. For retirement accounts, Illinois treats 401(k) earnings and contributions made during the marriage as ‘marital’ property. It regards those made before and after the marriage as ‘non-marital’ property.

Illinois is an equitable division State.  This means that the court does not presume a 50/50 division of marital property, including the marital portion of retirement accounts. However, in most cases, the court divides the assets equally unless there are extenuating circumstances. Such circumstances include the length of the marriage, the parties’ future earning capacity, significant age differences, and the amount of non-marital funds each party has, among others.

The division of the non-marital portion of a retirement account is different. Usually, the earner of the 401(k) retains 100% of the non-marital portion earned before and after the marriage. If you have statements showing the balance of the 401(k) as of the date of the marriage, the interest accrued on the non-marital portions can also be accounted for.

The parties can change the 50/50 division of marital retirement accounts if they agree upon a different arrangement. These outcomes are case-specific, so we recommend speaking with an experienced family law attorney to discuss whether this could be an option for you.

3. How can I avoid losing my 401k in divorce?

In a negotiation to reach a settlement, a party can try to protect their 401(k) by agreeing upon divisions of other assets or accounts. This can be favorable if people want to avoid certain tax consequences or penalties for disbursing from retirement accounts early.

For individuals who have not yet married, a prenuptial agreement is an option. A prenuptial agreement, or a “prenup”, allows parties to come to agreements before their marriage regarding the division of assets after the marriage. One asset that can be determined in a prenup is a retirement account.

For individuals who are already married, a postnuptial agreement may be an avenue to keep separate retirement accounts separate in the case of a divorce.

4. Should I cash out my 401k before divorce?

First and foremost, recognize that pulling money out of a 401(k) or other retirement account can result in tax consequences or penalties. Nonetheless, if you withdraw money from your retirement account, that money must be accounted for. It remains marital property regardless of whether it is still in the retirement account.

Additionally, if a party tries to hide funds of any sort—including those from retirement accounts—it will severely impact their case. Trying to hide money or other assets will backfire and cause credibility issues. Furthermore, the court may issue sanctions against that party, requiring them to pay a monetary penalty to the other party.

Instead of trying to hide assets from your spouse and causing severe damage to your case, you should speak to an attorney. They can help you make the best argument to keep your retirement accounts or to divide them in a beneficial way.

5. Will I lose my ex-spouse’s retirement if I remarry?

Getting remarried after a divorce can be an exciting time.  The process can also be a confusing time regarding what happens to any assets from a prior marriage. What happens with an ex-spouse’s retirement depends on many circumstances that are case-specific. For example, if you opt for a lump-sum payment at divorce, you will keep that lump sum. But what if you were getting social security benefits from an ex-spouse? In this case, your eligibility for benefits from your ex-spouse’s Social Security depends on two factors: how your first marriage ended (death or otherwise) and if your new marriage has ended. Numerous other factors can affect the answer to this question.  Please speak to an experienced Chicago divorce attorney to see what impact a new marriage may have on your retirement plans.