Retirement accounts are often the single largest asset in the marital estate. Properly dividing them is essential to a fair allocation of the martial estate. Dividing retirement accounts is often more complex than other marital assets because the division may give rise to tax liability and early withdrawal penalties. Before discussing settlement terms with a spouse, it is critical to learn about Illinois property division laws related to retirement accounts from an experienced Chicago divorce attorney.
Illinois is an equitable division state. A judge is not required to divide marital assets equally between the parties. Instead, a judge may consider several factors when determining what is equitable or “fair” regarding the division of property and debt in a divorce.
Some of the factors a judge may consider include:
Marital property typically includes any assets accumulated during the marriage. Inherited assets may remain separate property if they are not commingled with marital property or otherwise converted into a marital asset. Property that was acquired before marriage and not converted to marital property typically remains separate property that is not subject to equitable division.
Retirement accounts can be challenging to allocate. The amount in the account before the marriage remains separate property. However, any money that accumulated in the retirement account during the marriage may be subject to equitable division between the spouses, even though one spouse entirely owns the retirement account.
Most retirement accounts have penalties for early withdrawal of funds from the account. Any distribution of funds may also trigger income tax liability. A Qualified Domestic Relations Order (QDRO) is required to transfer an ownership interest in a retirement account. A QDRO is a court order that directs the retirement account management company to transfer a specific amount from the account to the non-owner spouse.
Provided the QDRO is drafted correctly and the funds are transferred into a qualified retirement account in the name of the non-owner spouse, both spouses can avoid penalties and tax liabilities for early withdrawal of the retirement funds. In some cases, the spouse receiving the retirement funds may need to use some of the funds immediately. The QDRO may address this to allow the spouse to receive a portion of the funds without the ten percent early withdrawal penalty, but the receiving spouse may incur tax liability for the disbursement.
Property division can be a challenging issue for spouses during a divorce proceeding, especially when it involves retirement accounts. Each spouse is concerned about how they will provide for themselves when they retire. Schedule a consult with a Chicago divorce attorney who has experience handling property division cases involving retirement accounts and reviewing QDROs to help ensure your best interests are protected, and you receive your fair share of the retirement accounts.
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