When only one spouse contributes to a retirement account through their employer, they are often surprised that their retirement nest egg is subject to property division in a divorce. Any portion of a pension earned during the marriage is marital property subject to equitable division.
Contributions and increases on a retirement account prior to marriage is considered separate property. However, when a couple marries, contributions and earnings made after the date of marriage are considered marital property subject to division in a divorce.
When dividing retirement accounts in a divorce, there are several approaches. The non-participant spouse may opt for a lump sum payment for their share of the account. They may instead elect to let it ride, waiting for the plan to pay out in the future to get a share of those benefit payments. In some cases, a spouse may agree that the account participant will keep the retirement account while the alternate payee (non participating spouse) gets additional marital assets such as equity in the family home to make up the difference.
Tax Consequences When Dividing Retirement Accounts in a Divorce
Whatever divorcing couples decide to do, it is important to first look at IRS rules regarding retirement accounts to avoid paying penalties for withdrawing funds too early. It may be that a non-participant spouse will want to roll over retirement funds into their own retirement account to avoid penalties and taxes depending on their age and retirement status.
Qualified Domestic Relations Order
For employment related retirement plans such as 401Ks and defined benefit pensions, divorcing couples must have a Qualified Domestic Relations Order or QDRO to divide the plan in a divorce. IRA retirement accounts do not require a QDRO, but the recipient spouse will pay taxes on the transfer unless the payout meets the requirements for a transfer of account incident to a divorce or the amount is directly transferred into an IRA retirement account in the non-participants name. For spouses of military members, there are complex rules to divide military pensions. An experienced property division lawyer with experienced working with military families can proved guidance.
Contact an Experienced Illinois Property Division Attorney for Assistance Today
When you have questions regarding the division of retirement accounts such as 401Ks, pensions, traditional or SEP IRA’s in a divorce, contact the Libertyville property division lawyers of Schlesinger & Strauss for help today at 847-680-4970.
