Your Retirement Benefits and Divorce
St. Charles Divorce Attorney
Many Americans have money put aside for their retirement. This money might be in an IRA, a 401(k), a 403(b), or a simple savings account. Many Americans also count on their pensions to cover their financial needs in retirement. These accounts, like checking, savings, and brokerage accounts, can be considered marital property if they are opened after an individual enters a marriage. Even when an individual opens a retirement account before he or she marries, if he or she continues to contribute to it during the marriage, presumably with his or her spouse, the account becomes marital property. In an Illinois divorce, marital property is divided among the couple according to the doctrine of equitable distribution. This means that the property is divided according to a set of factors that the court uses to determine a fair distribution, rather than simply cutting the entire marital estate in half.
What is a QDRO?
The court may order a Qualified Domestic Relations Order (QDRO) as part of your property division. This is a court order that assigns an alternate payee to a retirement account so he or she can receive a portion of its funds. Although in most cases, the retirement account holder's spouse is named as the alternate payee, his or her children may also be named through a QDRO. This order can be used to divide retirement savings or to fulfill financial obligations of the paying party, such as spousal maintenance or child support. As long as all IRS requirements regarding your QDRO are followed correctly, a QDRO is a tax-free transaction.
Tax Implications for your Retirement Benefits After Divorce
Before you begin the property division process, speak with your accountant about the tax implications you will face related to your retirement accounts. In some cases, the money is not taxable until it is withdrawn from the account. When dividing a married couple's assets, the court considers the tax implications of these assets to ensure that neither party is saddled with a tax burden he or she cannot afford.
The type of plan you have determines the tax implications you and your former spouse will face after dividing it. If you have an IRA, you can opt to have your monetary division from it be treated as a transfer incident, which is the transfer of money from one IRA into another without having to pay taxes on the transaction. It is treated like a rollover or a gift from one party to another. One the receiving party makes distributions from the account, he or she is responsible for all tax obligations related to these distributions.
Dividing Retirement Benefits in a Divorce
The court does not necessarily have to make all the decisions about how your retirement plans are divided in your divorce. If you choose to divorce through a settlement or collaborative divorce, you and your spouse can work together with your respective attorneys to reach an agreement that benefits you both. You can also choose to divorce through mediation, which is a process through which a couple can reach a mutually-satisfying divorce settlement through a series of guided sessions with a mediator, a neutral third party who works with the couple to dissolve their marriage.
These are not always viable options, though. Even if they are, you might still have the court impose a QDRO to divide your retirement benefits simply to ensure that they are divided fairly. The factors the court considers when dividing marital assets, both retirement accounts and other assets, include each partner's age and health, each partner's capacity for earning an income, each partner's responsibilities after the divorce such as acting as the primary caregiver of the couple's children or the responsibility to pay spousal maintenance, and the value of each asset in the couple's pool of marital property.
Work with an Experienced Kane County Divorce Lawyer
If you are considering filing for divorce, speak with an experienced Kane County divorce lawyer about what you should expect from the asset division process. He or she can explain the process to you and determine a strategy to help you reach a satisfying divorce settlement. To learn more, set up your free legal consultation with Shaw Family Law, P.C. today. We can answer any questions you have and provide you with the legal guidance and representation you need for your divorce.