How Are Retirement Accounts Divided in Illinois Divorce?

In this article we will explain the division of retirement accounts such as IRAs, 401(k)s, and pensions in Illinois divorce.  We will discuss when a retirement account will be classified as a marital asset.  We will explain what a QDRO is and how QDROs work.  We will also discuss some special considerations that apply to the division of retirement accounts in divorce.  

For some foundational information about the factors Illinois courts consider when dividing assets in divorce, you may want to check out our article, How is Property Divided in a Divorce?  As a quick review, a “marital asset” is an asset that is subject to division between the parties in a divorce.  A “non-marital asset” is an asset that belongs to one particular party exclusively and is not part of the marital estate.  

Is a Retirement Account a Marital Asset in Illinois Divorce?

The dollar amount of a retirement account accumulated before the marriage is considered a non-marital asset.  The dollar amount accumulated after the marriage is a marital asset and therefore subject to division between the parties.  This means that part of the value of a retirement account may be considered a marital asset while the remaining value is treated as a non-marital asset.  To the extent that a retirement account is a marital asset, it will be subject to division just as any other marital asset in the divorce.

What is a QDRO?

Determining how a retirement account will be divided is only the first step.  Next, the plan administrator must be instructed as to the details of the division and how the division of the retirement account will be accomplished.  This is done through a Qualified Domestic Relation Order, more commonly known as a QDRO.  

The Qualified Domestic Relations Order is a court order that lays out how a retirement account will be divided and instructs the plan administrator to execute the division.  QDROs are usually entered after the divorce is final.  The QDRO will be submitted for approval to the plan administrator along with the order for marital dissolution and then submitted to the judge for signature.  Finally, the executed order is returned to the plan administrator.  

Most types of retirement accounts require a QDRO for division.  However, IRAs do not require a QDRO, and retirement plans governed by the Illinois Pension Code require a different instrument known as a Qualified Illinois Domestic Relations Order, or QIDRO.  

What Happens if a Retirement Account is Distributed Immediately in an Illinois Divorce?

QDROs may provide for immediate distribution of the spouse’s portion of the retirement account or may provide for distribution of each spouse’s share upon retirement.  If cash is distributed immediately pursuant to a QDRO, neither party will be required to pay the usual 10% penalty for early withdrawals.  However, the party receiving the cash will be required to pay taxes on the proceeds the year they are received unless he or she rolls over the proceeds into his or her own retirement account.  

Special Considerations for Retirement Accounts in Divorce

Although retirement accounts are for the most part divided like any other asset in a divorce, there are a few special considerations for the parties to keep in mind when determining the division:

• Because there are sometimes negative tax consequences to paying out a retirement account, the parties may choose to offset the value of the spouse’s share of the retirement account with another asset rather than actually splitting the account.  The spouse who would be entitled to receive a payout of the account may agree to forego the distribution and instead receive an additional share in a different asset equalling the amount that would have otherwise been distributed from the retirement account.
• The value of retirement accounts can be difficult to calculate, because they often contain stocks that fluctuate in value.  If the value on a particular day is used, the account may go up or down in value between the date of the valuation and the date of distribution, benefitting one of the parties to the detriment of the other.  
• Not all retirement accounts containing the same dollar amount are equal in real value.  The parties should consider the future tax treatment of the account when agreeing on distribution.  For example, a Roth IRA that has already been taxed and will not be taxed upon distribution is more valuable than a 401(k) containing the same dollar amount, because the 401(k) will be subject to tax at distribution.