Dividing Retirement Accounts During a Divorce in Illinois
Whether it’s a pension, 401(k), or other retirement account, it can be split in a divorce if it is marital property. In Illinois, the court calculates what portion of the retirement is marital using the fraction method. This method looks at what portion of the retirement account came from during the marriage.
Dividing retirement accounts is a stressful and confusing piece of property division. Not only are they complicated, but they are also your plan for the future.
Retirement accounts are more complex because there are a couple extra steps for them. To take care of your retirement accounts, it takes a good amount of planning and a bit of extra financial knowledge.
This article will give more clarity on what needs to happen, but if you need more help, feel free to reach out to Sterling Hughes. Also, if you already have an attorney, they will further walk you through this process.
Types of Retirement Plans to Divide
There are a variety of retirement plans that need to be addressed in the property division process of a divorce. These retirement plan types include:
- IRA (Individual Retirement Accounts)
- TSP (Thrift Savings Plan)
Retirement plans are divided if they are marital property. The money that was added during the marriage is considered marital property. You can then calculate how much the other party deserves based on what portion is marital property
How the Value Is Calculated
Retirement accounts are created intentionally to increase in value over time. Should the future value be considered in the divorce?
There is no easy answer. For some accounts it makes more sense to look at the present value and for others it makes more sense to keep the future value in mind. One key reason to keep the future value in mind is that some accounts are taxed when the money is withdrawn.
The Illinois court makes decisions based on what is equitable and fair. So, think about what the courts will see as fair to both parties based on your specific situation. Your attorneys can also make recommendations on what to do.
For Immediate help with your family law case or answering any questions please call (312) 757-8082 now!
Steps to Dividing a Retirement Account
These seven steps will take you from determining how to divide your retirement all the way to when it is split. Whether you have an attorney or not, these are the steps you will go through. If you have an attorney, they will help you through most of the steps and even do some of them for you.
1. Determine Which Retirement Division Order You Need
Retirement division orders are the orders that dictate what will happen to the retirement accounts after the divorce. There are three types of orders that each have different uses:
- Qualified Domestic Relations Orders (QDROs): These orders divide private company pensions, 401ks, and other similar accounts.
- Qualified Illinois Domestic Relations Orders (QILDROs): These orders are specific to Illinois because they divide retirement and pension benefits for Illinois government employees.
- Military Retired Benefit Division Order: These divide military pay for retired veterans such as pensions or thrift savings plans (TSPs).
Most people use a QDRO but be sure to have the correct order for your situation.
It is also important to know that not all retirement plans need a division order. For example, IRAs do not need a specific order because the split off portion can be put into a new IRA. Be sure to speak with the person advising your IRA about any potential tax consequences.
2. Determine What Portion Qualifies as Marital Property
A piece of your retirement may not be non-marital property meaning it doesn’t need to get split. A portion of your retirement can be non-marital if it was put into the account before the marriage.
For example, if you were married for 4 years and you added to your 401(k) throughout the marriage and two years before it, then only 2/3 of the account is marital property. To do this, you need to have records proving the period when funds were added. The interest gained on the 1/3 of the account that is non-marital property is also nonmarital, as long as you can accurately track it.
3. Determine If Part of the Account Will Be Transferred
Once you understand how much of the retirement is marital property and how much it is worth, you can decide what to do. Say the marital portion of the account $20,000, that means each party deserves $10,000 of that. But one party may prefer to keep a car worth a similar amount rather than their portion of the retirement.
A portion of the retirement account only needs to be transferred if that account is being split. You only need to continue through these steps if an account is being split. If one party is keeping the whole retirement account, simply state that in the final divorce order.
4. Draft the Retirement Division Order
Whichever order you need for your situation needs to be drafted. If you don’t have an attorney, you can hire one just to draft this document. Some attorneys do not draft these, but if they don’t, they will have someone they regularly use.
5. Include the Order in the Final Divorce Orders
This step is pretty simple, you just add this order in with the final orders. The final orders will also include things like what will happen to the rest of your assets, any child custody orders, and things like that. The final orders just need to be accepted by the court and then you are just about done.
6. Submit the Order to the Plan Administrator
Once the document is drafted, it needs to be approved by your retirement plan administrator. Each retirement plan has rules for when a retirement division order can be accepted. If possible, try to get these rules before drafting.
If the administrator denies your draft, they will reply with the things that need to be fixed. Once those fixes are made, they should accept your order.
7. Money Gets Sent
Once your draft has been accepted and the court accepts your final orders, you can submit your order for execution. This happens after the divorce is finalized and can take around a month.
Are you ready to move forward? Call (312) 757-8082 to schedule a strategy session with one of our attorneys.
What Are Some Potential Alternatives to Dividing Your Retirement Savings?
If you aren’t interested in dividing your retirement account, the other party could take another asset in exchange. But this can be hard to pull off. Retirement accounts increase in value over time, so some people are not comfortable taking a fixed asset in exchange.
What About Social Security and Other Government Benefits?
Government benefits and social security payments are not considered an asset and are part of the property division process. However, if a party has already received money from social security and has it in a savings account, the money in that account is a marital asset.
Will I Be Charged with a Penalty or Taxes for Dividing a Retirement Account in My Divorce?
Many retirement accounts have penalties for pulling out of them early. But, just like how you can often combine 401(k)s without penalty, they can also often be split without penalty. To best understand the potential consequences, you will have to talk to the administrator of your retirement plan.
Frequently Asked Questions
How is retirement split in divorce in Illinois?
Retirements are split proportionally to how much was added to the account during the marriage. If the retirement account was only added to during the marriage, then all of it can be split.
The court first lets the divorcing parties work out an agreement for themselves. So, the account may not have to be split if the other party has something of equal value they can take. If parties cannot come to an agreement, the court will divide the property for them.
Can my wife take half my retirement if we divorce?
If you and your spouse are divorcing, there is a chance your spouse could get half of your retirement. If they have their own retirement of similar value, then each party could keep their own. But, if the other party specifically wants your retirement, they could get a portion of it. Investments are split similarly.
Is my spouse entitled to my 401k in divorce in Illinois?
Your spouse may be entitled to some of your 401(k). If the account was added to during the marriage, your spouse could get half of that money. There is no set amount of time you have to be married to get the other party’s 401(k).
How is Illinois pension calculated in divorce?
Similar to other types of retirements, the Illinois court prefers the fraction approach. This means the court looks at how much money in the account was contributed during the marriage. If half of it was contributed during the marriage, that half is considered marital property.
Can my ex-wife claim my pension years after divorce in Illinois?
If the pension was part of the property division process and it was allotted to you, then your ex cannot go after it later. However, if the pension was a hidden asset that wasn’t included in the final divorce agreement, then they could go after you for it.