How Are Retirement Benefits Addressed During an Illinois Divorce?

 Posted on September 18,2021 in Divorce

If you have chosen to get a divorce, you will need to address multiple types of financial issues, as well as the legal matters involved in dissolving your marriage. The process of property division can often become complicated, especially if you and your spouse own multiple and different types of property and assets. Retirement benefits are an issue that sometimes can complicate this process, and determining how to divide these assets correctly can ensure that you will have the financial resources you need later in life.

Retirement Accounts, Pensions, and QDROs

Generally, any retirement benefits you or your spouse earned or contributed to during your marriage are part of the marital estate. They will need to be divided alongside your other marital property. These benefits may include retirement accounts provided by an employer, such as a 401(k), or an individual retirement account (IRA), as well as pension benefits earned while you were married.

In many cases, a spouse will be able to keep retirement accounts that are in his or her own name. However, the funds in these accounts may be divided by withdrawing or transferring some of the balance. It is important to understand that if you choose to withdraw funds from a retirement account before reaching the age of 59 ½, penalties may apply, and taxes also must be paid on the amounts that are withdrawn or transferred.

For 401(k) accounts and other employer-sponsored retirement plans, taxes and penalties can be avoided by creating a Qualified Domestic Relations Order (QDRO). This type of order will be submitted to the administrator of the plan, instructing the administrator to transfer a certain dollar amount or percentage of the account’s funds to the other spouse. When a QDRO is used to withdraw funds, penalties for early withdrawal will not apply. If the funds are then rolled over into an account owned by the other spouse, taxes will not need to be paid on the withdrawn amount. For IRA’s, a “transfer incident to divorce” may be used to withdraw and transfer funds to the other spouse without the application of penalties or taxes.

Pensions can sometimes be more complicated to address during the divorce process. If you or your spouse earned pension benefits while you were married, the other spouse may be entitled to receive a percentage of these benefits. This percentage will usually be based on the amount of time you were married while pension benefits were being earned. For example, if your spouse expects to work in a pension-eligible position for a total of 40 years, and you were married for 10 of those years, one-fourth of the pension benefits would be considered marital property. When your spouse retires, you would be able to receive half of the marital portion of the pension benefits or 12.5 percent of the pension payments. A QDRO can be used to divide pension benefits, and it will specify that once a person retires and begins receiving pension benefits, the plan administrator should pay a percentage of the payments to his or her ex-spouse.

Contact Our Kane County Property Division Attorney

If you need to address retirement benefits during your divorce, The Thomas Law Office can explain your rights and options and advocate for your interests when negotiating a divorce settlement. Contact our McHenry County retirement asset division lawyer at 847-426-7990 to arrange a consultation and learn more about how we can help with your case.

Sources:

https://www.investopedia.com/terms/q/qdro.asp

https://www.investopedia.com/articles/retirement/03/060403.asp