Understanding the division of retirement assets in a divorce

Understanding the division of retirement assets in a divorce

During the property division phase of a divorce, some people draw a blank when the subject of dividing retirement accounts takes center stage.

The process can become complicated, so it is a good idea to brush up on your understanding of retirement accounts that are marital property and learn how the division of those accounts occurs.

Illinois standards

Illinois is an equitable property division state, which means that in a divorce, the judge will often approve a 50/50 split of marital property, or close to it, based on factors such as the length of the marriage and the earning power of both parties. Retirement accounts are often among the assets up for division.

Different approaches

Different accounts require different distribution procedures. A transfer incident applies to individual retirement account funds to ensure tax-free movement. A Qualified Domestic Relations Order works with a 401(k) to ensure proper distribution of the funds from this kind of retirement account. A QDRO is also used in the distribution of a pension plan. Each retirement or pension plan requires a separate QDRO. Pension plans offer lifetime-only benefits for the employee’s lifetime, or joint-survivor benefits for the lifetimes of both the employee and nonemployee, such as a spouse or partner.

Tax implications

There are also different tax consequences depending on the account you have. For example, with a 401(k) or traditional IRA, you deduct your contributions and pay taxes on the withdrawals at a later date. However, you make contributions to a Roth IRA after paying income tax, then take tax-free withdrawals later.

The rollover concept

Distribution options include the rollover option, which refers to receiving funds from a retirement account by rolling those assets into your own retirement account. You have some options here: request a direct transfer of funds, delay taking a distribution until the holder of the account retires or take your share of the funds in cash. 

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