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3 Tips: Splitting Retirement in Uncontested Divorce

While an uncontested divorce in Illinois can be fast and affordable, that doesn’t mean everything is totally simple. One of the areas that people often find confusing is the division of reitrement accounts such as an IRA, 401k, pension, 403b, or deferred compensation.  As a divorce lawyer in Illinois, I wrote this artilce about three tips for splitting retirement accounts in divorce.

Tip 1: Understand what could be split

For the most part, an asssets or debts accumulated during a marriage are part of the so-called “marital estate” and need to be split in a divorce.

The marital estate includes not just regular checking and savings accounts, but also retirement accounts. Many people have a problem with that. Sometimes I feel that people treat retirement accounts as part of their body which cannot be removed.

But that’s not the case. Even though only one person’s name is on a retirement account – like the case with a 401k or pension – whatever part of that account was accumulated during the marriage is part of the marital estate. And therefore, it is part of what will be split durign a divorce.

That being said, sometimes the assets can be divided so that that it is not necessary to transfer retirement funds from one person’s account to another. Exactly how the marital estate is split is up to the two spuses, but just know that retirement accounts are one part of what will be split – they’re not excluded.

Tip 2: Know what retirement accounts can be used for

As you may have picked up from Tip 1, in a divorce retirement acconts are party of what is divided between the spouses. But retirement accounts can also be used for purposes other that assets division.

They can also be used for the payment of child support, spousal maintenance, and attorney fees.

Tip 3: Understand the states of spitting retirement

There are a couple steps to dividing retirement account as part of the process of splitting assets in a divorce.

  1. Step 1: Perform valuation of the account. A retirement account can be composed of marital and non-marital funds. The marital funds are part of the marital estate, and subject to division in a divorce. The non-marital funds are not subjet to divsion, and therefore, they remain with the person who holds the account. If a single retirement account has both marital and non-marital funds in it, than an expert must be used to determine the amounts of each. For example, if someone starts accumulating 401k assets in 2010, then gets married in 2014, and wants to get divorce in 2018, then the 401k would contain both marital and non-marital assets. When my clients need to value an account to determine the marital and non-marital portions, they normally use an actuary or accountant to perform the calculation.
  2. Step 2: Following the procedure for transferring the funds. Getting funds out of an IRA is pretty simple. Conversely, it can be significantly more complicated to get funds out of a pension, 401k, or deferrered compensation. That’s because IRS regulations require special orders to avoid unecessary penalites. An order to remove funds from such accounts is called a qualified domestic relations order (QDDRO), or in the case of a plan from the state of Illinois, an qualified Illinois domestic relatinos order (QILDRO).

Dividing retirement accoutns can be technical, but in terms of the valuation of marital and non-marital amounts, and in terms of properly drafting a QDRO or QILDRO. Many people prevoiusly used Wendy Drefahl of WFA Econometrics – a company based on Wisconsin. However, I never recomended my clients use that company because Wendy Drefahl was not an attorney, actuary, or accountant. However, some lawyers wrote marital settlement agreements that required both parties to use Wendy Drefahl or WFA Econometrics. Because Wendy is no longer available for such work, people who were previously required to use her might consider seeking another option. If they do, I would recommend an actuary, lawyer, or accountant who specialized in that type of work.