Dividing up 401(k)s and other retirement assets in a divorce

Dividing up 401(k)s and other retirement assets in a divorce

Illinois couples divorcing after their 30s, likely already have some retirement assets to divide. The older the couple, or more specifically, the breadwinner, the more valuable the retirement assets may be. When these retirements plans were first put in place, the couple may not have made provisions for divorce. However, the higher earner now has to consider how the lower-earning spouse or homemaker fares financially on their own.

According to Forbes, most states view retirement plans as marital assets. Because of this, unless a legitimate prenuptial agreement already makes provisions that include retirement assets, each spouse may be entitled to a portion of these assets. In community property law states, the split ratio is usually 50/50.

Sometimes, the breadwinner may use the retirement plan to pay for child support, spousal support or satisfy property division requirements via a Qualified Domestic Relations Order. Because of how the government now treats alimony for tax purposes, more couples are considering using retirement assets to pay alimony or spousal support settlements.

Pensions can be difficult to divide up, since there is no hard cash value per se. Individual Retirement Accounts assets are much simpler to share. Taking the retirement assets may be most ideal for the receiving spouse if they do not need immediate access to these funds as there is a 10% premature penalty. Thus, it is best used for its intended purposes, retirement.

According to CNBC, there may be a way around this. The recipient of the retirement assets may opt not to have the money rolled over into another retirement account. Divorce is one of the few times when they would not need to pay the premature penalty for withdrawing the money, but they would instead need to pay income taxes on the money received.

Decisions related to dividing up retirement accounts are to blame for 62% of fights during a divorce. This is an especially sensitive issue for the spouse who may not have been working, or who may have limited their work hours to take care of the home, travel and move with the other spouse, or raise the children. Without retirement assets, alimony or other forms of support, these people would face financial hardships on their own.

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