401k and Pension Division in a Illinois Divorce

401(k) and IRA Plans and Divorce in Illinois

Generally speaking, a judge treats retirement plan assets as any other type of property under Illinois divorce laws. But there are some things you should know about splitting up a 401(k) in a divorce. First, the judge will determine which portion of the plan assets is marital property.

In a general sense, the court defines the dollar amount of a retirement account accumulated between the marriage and divorce as marital property. It defines the dollar amount accumulated before the date of the marriage as private property.

Moving forward, the court will consider many of the same factors mentioned above when deciding how these financial assets should be divided. In the case of a 401(k), the judge would issue a Qualified Domestic Relation Order (QDRO) to the plan administrator(s).

This document details how the account would be divided and by what means. In this case, you may be better off if the shares are stated as percentages instead of dollar amounts. The move may protect either spouse during major market swings.

But keep in mind that some plan administrators may have their own rules dictating how they move money around in a qualified plan in order to comply with stringent federal regulations. The court usually issues QDROs after finalizing the divorce.

But you want to make sure this is the case. Any movement of funds from a retirement plan like a 401(k) or even an individual retirement account (IRA) before the account holder reaches age 59.5 may leave him or her open to serious tax penalties.

Moving forward, recipients of funds have a few choices when it comes to taking their shares from a 401(k). The QDRO may direct immediate distribution. In this scenario, neither spouse would owe the 10% early withdrawal penalty if one applies at all. However, recipients would owe regular income tax on the amount they receive. This may not apply when dealing with a Roth 401(k). Both spouses can avoid either type of tax by setting up 401(k) rollovers into their own accounts.

The process for dividing an IRA is a bit different. A QDRO does not apply when dividing IRA assets. However, the couple should wait until the judge finalizes the divorce to avoid penalties and taxes. A divorce decree can be sent to the IRA administrator, indicating how the assets in the account should be split up. Either party would also benefit from transferring the right share directly to a personal IRA. This is known as a trustee-to-trustee transfer. This would steer both parties clear from potential penalties and taxes.

As you can see, splitting retirement plan assets can be particularly complicated, especially when you consider potential tax consequences and the true value of retirement savings. When analyzing these situations, it’s important for either spouse to find a financial advisor and divorce lawyer who can offer the guidance necessary to make this process run as smoothly as possible.