Regardless of how old you are and how much you have saved for retirement, your retirement account is likely to be among the most-important aspects involved in your divorce. If you are in the early stages of saving for the future, you likely know the importance of getting an early start, and that the more you save now, the more opportunity your account will have to grow. If you are approaching retirement age, or if you are currently relying on distributions from a 401(k), IRA, or pension, every dollar could be important, and you need to be sure that you hold on to as much as possible.
With all of this said, how are retirement accounts and pensions treated during the divorce process? In Illinois, the simple answer is: They are treated just like everything else. Retirement accounts are assets that are subject to equitable distribution, and any portion of your retirement savings that qualifies as “marital property” will be on the table in your divorce.
4 Key Considerations for Dealing with Retirement Assets During an Illinois Divorce
However, there are several unique aspects to dealing with retirement accounts during a divorce in Illinois as well. From determining what portion of your retirement savings is at issue to exploring alternatives to dividing your 401(k), IRA, or pension, there are many issues that require careful consideration before you resign yourself to giving up half of everything you have worked so hard to save. In this article, we will provide a brief introduction to the following issues:
- Determining what portion of your retirement savings qualifies as “marital property”
- Placing an appropriate value on the “marital property” portion of your retirement savings
- Alternatives to splitting retirement assets in a divorce
- How to deal with Social Security and other government benefits
1. What Portion of Your Retirement Savings Qualifies as “Marital Property”?
In Illinois, the division of divorcing spouses’ assets is governed by the principle of equitable distribution. A fundamental tenet of Illinois’ equitable distribution law is that spouses’ “marital property” is subject to distribution, while their “separate property” is not. Generally, an asset qualifies as “marital property” if it was acquired during the marriage. However, there are some exceptions; and, when it comes to the funds in a 401(k), IRA, or pension, it won’t always be clear when these funds were acquired.
For example, let’s assume that your retirement account was worth $50,000 when you got married, and it is worth $500,000 today. Does this simply mean that $450,000 of your retirement assets will be deemed “marital property”? Not necessarily. In fact, probably not. If the $50,000 in assets that you brought into your marriage are worth more today, then the appreciation on these assets will generally be yours to keep as well. It is also very possible that the stocks, bonds, and other assets that comprised your portfolio when you got married are not part of your portfolio today. If this is the case, it will be necessary to trace your account’s transaction history in order to determine exactly how much of your retirement savings qualifies as your “separate property.”
2. How are Retirement Assets Valued for Purposes of a Divorce?
Another issue that requires careful consideration when dealing with retirement assets in a divorce is how to appropriately value your pension or portfolio. Even setting aside any additional contributions you may make in the future, your retirement assets could be worth far more in 10, 20, or 30 years than they are today. So, when it comes to your divorce, do you simply look at the present value of your account (which could also vary significantly on a day-to-day basis); or, do you look to the future value of the account when you (and potentially your spouse) will be able to make withdrawals in retirement?
The answer to this question will determine on the specific type of retirement plan that you have. Certain types of plans are valued based on their present cash value, while others require a valuation that looks to the future value of distributions. In either case, the plan’s tax treatment is a relevant consideration as well, as any deferred tax liability could substantially reduce the value of portfolio assets for divorce purposes.
3. What are Some Potential Alternatives to Dividing Your Retirement Savings?
Once you have identified the portion of your retirement assets that qualify as “marital property” and you have valued that portion appropriately, what comes next? While one option is to split your retirement savings, this is by no means the only option that is available. In many cases, divorcing spouses will find it mutually beneficial to consider alternatives such as:
- Allowing each spouse to keep his or her own retirement savings;
- Allowing one spouse to keep his or her entire retirement account in exchange for giving up other marital assets of substantially equal value; or,
- Allowing one spouse to “buy out” the other spouse’s interest in the “marital property” component of the first spouse’s retirement.
Ultimately, you will need to decide which option best serves your long-term financial goals, and you will need to work with your divorce attorney to develop a strategy for pursuing this option during your divorce.
4. What about Social Security and Other Government Benefits?
Finally, when discussing retirement accounts, it is worth touching on Social Security, Supplemental Security Income (SSI), and other government benefits. As a general rule, these benefits are not considered “assets,” and therefore they are not subject to distribution in a divorce (although payments collected prior to your divorce will generally qualify as “marital property”). In some cases, divorced individuals will be eligible to collect Social Security and other benefits based on their former spouses’ eligibility; however, as someone who is eligible to collect benefits, the fact that you are divorced generally will not impact your eligibility.
Contact Gurnee, IL Divorce Attorney Deanna J. Bowen
If you would like to learn more about your options for protecting your retirement savings during your divorce, we encourage you to get in touch. To request an appointment with Gurnee, IL divorce attorney Deanna J. Bowen, please call 847-623-4002 or inquire online today.