Anderson & Boback Logo
dividing-retirement-accounts-divorce

Dividing Retirement Accounts in Divorce

Published
Categorized as Illinois Divorce, Property Division

Dividing retirement accounts in divorce is often confusing and complex for many couples going through a divorce in Illinois. Dividing retirement accounts – 401(k)s, pension plans, IRAs, etc. – like  any other assets to be divided in an Illinois divorce follow the rules of equitable division of marital property.

The General Rules of Property Division

As mentioned in prior blog posts, Illinois is not a “community property state”;  it is an “equitable distribution” state. In a “community property” state there is a presumption that all marital property will be divided equally.  In Illinois, we provide an “equitable division” of said marital property, based upon certain factors and criteria. Equitable is not always equal.

Generally, in Illinois marital property can be divided disproportionately in  when there is a lengthy marriage, a disproportionate future earning capacity, when the parties have significant age difference, as well as when many other factors are present.  However, in Illinois retirement accounts are generally divided without much regard to those specific factors.

Why is Retirement often Divided Differently than other Marital Assets?

While there is no “set in stone” rule about how retirement accounts are to be divided, many Judges in Illinois divide them 50/50, despite other marital property being divided disproportionately.  There are many reasons why this might occur. First, at the time of retirement, no one is working, and both parties may be drawing on the same social security, depending upon the years of marriage, any remarriages, etc.  But generally speaking, the parties, at the time of retirement, are on so called “equal footing” because no one is employed. The marital share of the retirement, thus, can be divided equally between the parties. However, it is not impossible to obtain a disproportionate share of retirement accounts, it is just very rare and reserved for extenuating circumstances.

Will I be Charged a Penalty or Taxes for Dividing a Retirement Account in my Divorce?

The answer to this common question is Maybe.

Paying a penalty or incurring a tax will depend upon what type of account is being divided.  Generally speaking, IRA accounts can be rolled over from one person to another without a special order or significant financial consequences.  However, 401(k) accounts and Pensions have to be divided pursuant to Qualified Order. Some IRAs require a qualified order for division, though less common.

Dividing 401(k) Accounts and Qualified Domestic Relations Order (QDRO)

The purpose of dividing a 401(k) using a Qualified Order is to avoid any tax consequences or penalties when transferring a share of said account to the other party.  Some retirement plans have different requirements than others. In most plans, so long as the Qualified Domestic Relations Order (“QDRO”) is drafted properly, signed by the Judge and certified, it will allow the transfer of a portion of the 401K account into a separate retirement account established in the name of the other party.  The transfer from one account to another using a QDRO waives the typical 10% penalty for an early withdrawal.

Sometimes QDROs can allow the person who the account is being transferred to, to take out a portion of said account in cash.  In this scenario, the plan administrator and plan documents must allow for this within the way the plan was initially set up, and not all plans allow this.  Additionally, while these funds typically will not be subjected to a 10% penalty, the person receiving the funds as cash will still have to pay the appropriate taxes on the disbursement in accordance with their income tax bracket.  However, rolling the share from the 401(k) account into a separate retirement account, where no cash is withdrawn, usually prohibits tax consequences from occurring.

What about Dividing Pensions in Divorce?

Dividing pension plans is different than other retirement accounts. Pensions are not defined benefits.  There generally is not an account sitting somewhere with a defined amount in it to be divided. The value of a pension typically involves many factors, including but not limited to the length of the employee’s employment.

Typically, dividing a pension plan in Illinois involves a “Qualified Illinois Domestic Relations Order” (QILDRO) at the time the divorce is finalized.  But, the QILDRO really only serves to notify the pension plan administrator that there is a share of the pension plan that belongs to a spouse.  Usually, a Calculation Order must be entered by the Judge at the time of the participant’s retirement so that the pension plan knows how much to pay the now ex-spouse.  This means if a share of your ex-spouse’s pension account was awarded to you in a divorce, you will need to seek legal input when your ex-spouse is ready to retire.

Dividing assets in a divorce can be complicated, especially when a couple has multiple retirement investment accounts that include a mix like pension plans and 401(k) accounts. Be sure your rights to and share of pension plans and 401(k)s are protected in your divorce. Feel free to contact Anderson & Boback when you need accurate legal advice from family law attorneys with deep expertise in dividing retirement accounts in divorce.

Was this information helpful?

You May Also Like

The legal term “best interests” is a concept that comes up in almost all child-related areas of family law. When making essentially any decision on behalf of a child, the court is going to look at what is best for…

Maintenance, formerly known as alimony, is a relief granted to a party in a dissolution of marriage case that equitably restores to the party a standard of living to which they became acclimated during the marriage.  For spouses going through…

Visitation interference occurs when the custodial parent in some way interferes with your ability to spend parenting time with your child or visit with them.  In Illinois, a parent has a couple of options when the other parent interferes with…

We receive inquiries regularly from parents of children in Illinois regarding whether or not they can remove their child from the state of Illinois when they are estranged from their child’s other parent.  The answer varies, depending on different situations.…

People often are confused about the difference between a Civil Union and a Domestic Partnership, and what their rights are if their partner, to whom they are not married, leaves them or predeceases them.  This blog is designed to explain…

One of the most hot-button terms in parenting cases in Cook County is “alienation”, meaning that one parent is actively seeking to keep the child from having a relationship with their other parents. The current laws on parenting favor both…

Anderson & Boback small logo

Download our Divorce Planning Guide today!

Get the information you need to prepare for divorce with our free resource Guide to Planning for Your Divorce.

What our clients are saying

Schedule a Discreet Consultation Today!

    Firm Overview
    ANDERSON & BOBACK

    Anderson & Boback is a highly-respected, experienced Chicago family law firm, skilled in negotiation and litigation. When divorce and other family law issues make your life chaotic and uncertain, you want your case resolved as quickly and fairly as possible. Call Now 312-715-0870