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Steps to Dividing Retirement Accounts in Divorce: 401k, pension, IRA, 403b, TSP

If you or your spouse has a retirement account and you want to get an uncontested divorce in Illinois, there are a few things you should know. You can check out his article, or call me at 224-300-0529.

As a flat fee uncontested divorce lawyer in Illinois, I can tell you that dividing retirement accounts is often confusing. In an uncontested divorce – or even in a contested divorce that settles – splitting retirement assets often takes planning and a bit of financial analysis. So whether your dividing a pension, 401k, IRA, 403b, or deferred compensation – check out this article to demystify the process a bit.

Step 1: Determine if you need a retirement division order like a QDRO

If you have been thinking about dividing a retirement plan in your Illinois divorce, then you may have come across the acronym “QDRO,” pronounced “KWAH-dro;” it stands for the term “qualified domestic relations order.”

A QDRO is a type of special, technical type of court order that is used in a divorce to take money out of one person’s retirement plan and give it to another person (either a spouse, or child). While QDRO is the most common term used for retirement division orders, you should understand that QDRO is kind of like calling facial tissue “Kleenex.” All facial tissue isn’t actually the brand Kleenex. So what other types of retirement division orders are there? Below are a few:

  1. Qualified Domestic Relations Orders: To divide private company pensions and 401ks, etc
  2. Qaulified Illinois Domestic Relations Orders: To divide retirement and pension benefits from government employment in Illinois
  3. Military Retired Benefit Division Order: To divide various sorts of military pay for retired veterans such as a pension or thrift savings plan (TSP)

You should know that all retirement plans do not require special retirement plan division orders. For example, an IRA does not require a special order.

Dividing retirement plans can be tricky, and people should consult an Illinois divorce lawyer who is familiar with guiding people through the division of retirement accounts.

Step 2: Determine what portion of the plan is marital vs nonmarital

The financial aspects of divorce are about dividing marital property. Marital property is, generally speaking, everything acquired during the marriage – except for gifts and inheritances.

Just like other assets, marital retirement assets must be assigned to one person, or another. That means every retirement account: 401k, IRA, pension, 403b, deferred compensation, thrift savings plan (TSP), and the like.

Sometimes, retirement plans can be part marital, and part nonmarial. So before one can divide the marital portion, it is necessary to determine what portion of the account is actually marital. Doing this can be complicated, and is beyond the scope of this article. But here is an example of how one retirement account can have both marital and nonmarital funds within:

  1. Year 1: You get a job and start contributing to the 401k
  2. Year 5: You get married, having had contributed to the 401 since Year 1.
  3. Year 8: You file for divorce and the 401k must be devided

In that example, the 401k assets attributable to Years 1 to the wedding would be nonmarital, and the funds attributable from the marriage to Year 8 would be marital.

As a special note, you should know that retirement accounts are treated differently than non-retirement financial accounts. With non-retirement accounts (like a checking account) if it starts off as a nonmarital account then the account holder puts marital money into it, that account can become marital altogether. That contrasts to retirement accounts which are often found to have both marital and nonmarital characteristics based upon when contributions were made to the account.

Step 3: Determine if some part of the account will be transferred

An important point is that people getting divorced in Illinois don’t have to split every single account down the middle, each taking half. That’s a lot of work.

And particularly with an uncontested divorce in Illinois, things should be fast and easy.

Sometimes, people want to split all their assets 50/50 and can accomplish that without splitting up a retirement account. However, a person may prefer to receive retirement assets rather than other assets to facilitate post-divorce retirement savings.

Whether your divorce will involve splitting a retirement account depends upon the following:

  1. If you want to receive retirement assets in a divorce, and
  2. If you must receive retirement assets to get your share of the marital estate.

And of course, since an uncontested divorce in Illinois is about agreement, you and your spouse will have to agree on which retirement account to divide, and how it will be divided.

Step 4: Draft the retirement division order

A retirement division order is a technical document. As a divorce lawyer in Illinois, I use a specialist lawyer to draft retirement division orders for my client. Many lawyers don’t do that. In fact, many lawyers in Illinois use a non-lawyer from Wisconsin –  I think that’s a terrible idea.

Step 5: Enter the order in court when the divorce is finalized

Once the retirement division order is drafted and approved by the retirement plan administrator, it is ready to be entered in Court.

in terms of a quick and affordable uncontested divorce in Illinois, that means entering the order at the same time as the prove up (the prove up is the court appearance where the divorce is finalized).

Step 6: Submit the order to the plan administrator

This part should be pretty simple, ideally. Each retirement plan has rules for the acceptability of a retirement division order. Once the order is draft, it should be submitted to the retirement plan administrator. The administrator should accept the order, then following the instructions in the order. For example, taking money out of an employee’s 401k and sending a check to that employee’s ex-spouse.

Sometimes, the retirement plan administrator does not accept the retirement division order, in which case it must be changed per their instructions, entered by the court (see Step 5), and sent back to the plan administrator.

Step 7: Money is sent out

As eluded to in Step 6, once the the plan administrator approves a retirement division order, they send out the money. Sometimes this can take a month or more.

What to do now

If you are concerned about splitting a retirement account in a divorce, you might have significant assets at stake. Consulting a lawyer to prepare for your divorce can be a good idea. And certainly, you should use a divorce lawyer for an uncontested divorce in Illinois. As I explained in this article, an uncontested divorce in Illinois can be fast and affordable, for a flat fee, but you should do it right.

As an Illinois divorce lawyer offering uncontested divorce services for a flat fee, my job is to help you move on with life. You can call me at  224-300-0529.