Challenges of Dividing Retirement Accounts in Divorce

 Posted on March 25, 2019 in Asset Division

The division of marital assets is one of the more complicated aspects of divorce, and retirement accounts present a number of unique issues that can make creating a fair settlement difficult. Since retirement accounts, especially 401(k)s, are accumulated through the individual efforts of one spouse, learning that this asset may be subject to division in a divorce is hard for many to accept. However, any amount in a retirement account classified as a marital asset must be divided, unless the spouses agree otherwise.

Valuing an account and determining how to structure a settlement are complicated matters that do not always have easy answers. Often, a spouse is forced to choose between the pros and cons of short- and long-term options when dividing retirement accounts, and working with an experienced divorce attorney is necessary to receive a complete picture of the implications of any decision. Retirement accounts are often a couple’s most valuable asset, so taking the time to assess how to approach this issue is one of the more critical aspects of a divorce case.

Classifying a Marital Asset

In Illinois, anything accumulated by either spouse during a marriage is considered a marital asset. Thus, for retirement accounts, funds contributed or earned before the marriage would be considered a non-marital asset and exempt from division. Any amount contributed to the account or generated during the marriage would be divided, meaning some percentage of a preexisting retirement account would be part of the divorce settlement. Because the value of retirement accounts can vary greatly from year to year, working with a financial expert to determine what the present and future value of this asset should be is key to working out an appropriate settlement. Assessments can differ, so working with a skilled attorney to negotiate an agreed upon amount is important to resolving this issue.

Unique Issues for Retirement Accounts

Because of the laws regulating the distribution of retirement accounts, simply agreeing on allocation in a divorce settlement is not enough to require a plan administrator to follow the distribution plan. To divide retirement accounts, an additional order must be entered, a Qualified Domestic Relations Order (QDRO), which is signed by the judge and instructs the plan administrator to divide the account as intended. Most retirement accounts require this additional step, outside of IRAs, and significant tax consequences result if this step is not followed, including a penalty for early distribution. In fact, present and future tax treatment should be a big part of deciding when to execute the distribution to the former, as well as whether taking other assets in lieu of retirement funds would be a better alternative. Again, values of retirement accounts can fluctuate widely, so the amount ordered in the settlement and amount available at distribution may not match. Determining how to divide this type of asset should be thoroughly discussed with an experienced divorce attorney.

Call a Wheaton, IL Divorce Attorney

You need financial security to weather the changes of divorce, and retirement accounts are often the most accessible asset to provide that stability. If you have questions about dividing your assets, talk to the knowledgeable DuPage County divorce attorneys at the Andrew Cores Family Law Group. Our dedication and attention to detail will help you get the settlement you need to move on with your life. Contact us at 630-871-1002 for a free consultation.

Sources:

http://www.ilga.gov/legislation/ilcs/documents/075000050k503.htm

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qdro-qualified-domestic-relations-order