How Are Retirement Assets Handled During a Divorce?

 Posted on June 27, 2022 in Division of Assets

Marriages can break down for a variety of reasons, but once a couple chooses to pursue a divorce, they will often be looking to make a clean break, separate their lives from each other, and determine how they can move forward successfully. However, this is not always easy, especially when a couple needs to address complex financial issues related to the assets they own and other financial resources that are available to them. During the property division process, spouses may need to determine how to handle multiple types of complex assets, including retirement accounts and benefits. It is crucial to address these matters correctly, since retaining ownership of these assets will ensure that a person will have the financial resources they need later in life.

To ensure that your rights and financial interests will be protected during your divorce, it is essential to secure representation from a qualified and experienced attorney. At Weiss-Kunz & Oliver, LLC, we regularly represent clients in complex divorce cases involving multiple different types of financial assets, as well as other issues that may lead to contentious disputes between spouses, such as child custody or spousal maintenance. With our strong knowledge of the divorce laws in Illinois, the best ways to handle different types of financial assets, and the methods that can be used to resolve disputes, we are prepared to protect your interests and help you find solutions that will allow you to succeed after your marriage has ended.

Types of Retirement Savings Accounts That May Need to Be Considered

There are multiple types of retirement accounts that may need to be considered during the divorce process. These fall into two general categories: qualified plans and non-qualified plans. Qualified plans are covered by the Employee Retirement Income Security Act (ERISA), and they include 401(k) accounts, 403(b) plans, and other tax-deferred retirement plans that are provided to employees as benefits by their employers. Non-qualified plans are not eligible for tax-deferred benefits under ERISA, and they may include individual retirement accounts (IRAs), simplified employee pensions (SEPs), and deferred compensation plans.

When addressing retirement accounts during divorce, a couple will need to determine whether these are considered to be marital assets or separate property. Since marital property includes any assets acquired by either spouse during a couple’s marriage, retirement accounts that were created and contributed to after a couple was married will be considered marital property. These accounts may include money deducted from a spouse’s wages, as well as matching contributions from their employer. Funds saved during the marriage, as well as the increase in value of an account due to interest and investments by a plan administrator will be considered to be marital assets.

In certain situations, a retirement account may be considered separate property, or only a certain portion of the funds in an account may be included in the marital estate. If a person had a retirement account before they were married, and they did not make any additional contributions to the account during their marriage, they will usually be able to retain ownership of the full value of the account. If a person made contributions to a separately-owned account during their marriage, a percentage of the funds in the account may be considered marital property, and that portion of the account may need to be divided between the spouses.

Dividing Funds in Retirement Accounts

By considering the full value of the funds in retirement accounts, the resources available to each spouse, and other types of marital property, a couple can determine the best ways to divide these assets. Spouses may have multiple options for dividing retirement accounts. If each spouse has an account in their own name, and these accounts are equivalent or similar in value, the spouses may be able to retain ownership of these accounts without transferring funds to each other. However, matters may become more complicated if a couple chooses to divide the funds in one or more accounts.

Because retirement accounts are meant to provide a person with financial resources after they stop working full-time at a certain age, they contain provisions that limit when withdrawals can be made. If a person chooses to withdraw funds before they reach a certain age, penalties may be charged. In most cases, accounts will recognize a retirement age of 59 ½, and a 10 percent penalty will apply to amounts withdrawn before a person reaches this age. 

Taxes can also be a consideration when making withdrawals from retirement accounts. In many cases, contributions to these accounts are tax-deferred, meaning that they will be deducted from a person’s income before income taxes are applied. Since taxes are not paid on these amounts at the time they are deposited into an account, a person will be required to pay taxes when they receive distributions from their savings after they retire. 

If the proper procedures are not followed when transferring funds from a retirement account during the divorce process, penalties may be imposed on withdrawals, and taxes may apply. For qualified retirement accounts, these issues can be avoided by using a qualified domestic relations order (QDRO). This is a court order that will be sent to the plan administrator with instructions to withdraw and transfer a percentage of the account’s funds or a certain dollar amount to someone other than the account holder. When using a QDRO, early withdrawal penalties will not apply, and the recipient of these funds will not be required to pay taxes if they deposit the funds they receive into their own retirement account.

For non-qualified retirement accounts, a QDRO will not be used, but an account holder may complete a process known as a “transfer incident to divorce.” A divorce settlement will specify that this type of transfer should be made, and the administrator of the plan may be provided with a copy of the divorce agreement. This will allow a withdrawal to be made without incurring penalties, and taxes will not apply as long as the amount is rolled over to a retirement account owned by the recipient of the funds.

Addressing Pension Benefits During Divorce

Spouses who work in pension-eligible positions may need to determine how these benefits will be divided along with other marital property. Pension benefits can be very valuable, providing ongoing income on a continuing basis from the date of a person’s retirement until their death. However, determining the actual value of these benefits is not always easy. Depending on a person’s age at the time of their divorce, their retirement may still be many years or multiple decades in the future. Since pension benefits are typically based on the income a person earns in the years immediately prior to their retirement, estimating the value of these benefits may be difficult.

In some cases, a couple may agree that a spouse may not be required to share their pension benefits, as long as the other spouse is able to retain ownership of their own retirement assets or other marital property. However, to avoid putting one spouse at a financial disadvantage, it is often best to divide the marital portion of pension benefits equally between the spouses.

To determine how pension benefits will be divided, spouses may need to consider how long a person worked in a pension-eligible position while they were married. For example, if a couple was married for a total of 15 years, and a person earned pension benefits during the entire marriage, the marital portion of the pension benefits will be determined by dividing 15 years by the total number of years the spouse worked and earned benefits. If the person worked for 35 years before retiring, the marital portion of the pension would be 15 divided by 35, or around 43 percent. If the marital portion of pension benefits is divided equally between the spouses, the other spouse would be entitled to receive half of that 43 percent, or 21.5 percent of the total amount of benefits that are paid out after retirement.

As with retirement accounts, pension benefits may be divided between spouses through the use of a QDRO. For Illinois spouses who work in public positions, such as teachers or other state employees, a special type of order known as a Qualified Illinois Domestic Relations Order (QILDRO) must be used. A QDRO or QILDRO will provide specific instructions for how pension benefits will be allocated between spouses. It may state that a percentage of pension payments will be paid to the ex-spouse, or a specific dollar amount may be paid to someone other than the pension holder. Other instructions may also be included, such as the start or end date of payments to an ex-spouse or whether an ex-spouse will be entitled to receive any death benefits that are paid out. The order will be provided to the administrator of the pension plan, who will pay out benefits to both the pension holder and their ex-spouse.

Resolving Disputes Over Retirement Assets

Because financial issues can be highly contentious matters to address in a divorce, it is important for spouses to understand the best ways to protect themselves. By fully understanding the value of different assets, identifying property that is important to them, and considering how the decisions they make may affect them in the future, a person can advocate for solutions that will divide the marital estate fairly and equitably while providing them with the resources they will need in the years to come.

It is often a good idea to consult with financial advisors during the divorce process to ensure that matters related to marital property will be addressed properly. Appraisers, accountants, or other financial experts can help calculate the current and future value of different assets, and they can provide advice on the benefits of retaining ownership of different types of property, including retirement accounts, pension benefits, real estate, business interests, or other valuable assets. A couple can then determine the best ways to divide different assets in a way that benefits both parties. When addressing these issues, a couple may use multiple different methods to negotiate a settlement, including mediation or collaborative divorce. In contentious cases where a couple is unable to resolve certain issues, litigation may be necessary, and a judge may make the final decisions about how assets will be divided.

Contact Our DuPage County Retirement Asset Division Lawyers

As you work to reach agreements with your spouse about how your marital property should be divided, our lawyers can make sure you address retirement accounts, pensions, and other complex assets properly. We will advocate on your behalf during negotiations or in the courtroom, and we will help you achieve an outcome that will provide you with financial stability as you move forward following your divorce. Contact our Elmhurst marital property division attorneys today at 312-605-4041 to get the legal help you need as you address complex financial concerns.

Sources:

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

https://www.thebalance.com/how-retirement-plan-assets-are-divided-in-a-divorce-1289260

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