If you are like many Illinois residents, your retirement account is one of the most valuable assets you own. As a result, it is also one of the most important assets you own. Or, maybe you have managed your home and family while your spouse worked and are relying on your spouse’s retirement savings to live comfortably in the coming years.
Either way, retirement will likely be vital if you or your spouse file for divorce.
Retirement accounts like IRAs and 401(k)s are unique because they enjoy a tax-advantaged status. When you contribute money to a retirement account, your contributions are not subject to state or federal income taxation. Alternatively, if you have a Roth IRA, your contributions are taxed, but your withdrawals are not. These tax benefits are designed to encourage people to save for retirement—and they are only available if you wait to start taking distributions until you reach retirement age.
When going through a divorce, spouses often need to divide their retirement accounts, effectively resulting in a pre-retirement distribution. This is where the qualified domestic relations order (QDRO) comes into play.
What Is a Qualified Domestic Relations Order (QDRO)?
Under Illinois law, retirement assets accumulated during a marriage are generally classified as marital property (unless the spouses have a prenuptial or postnuptial agreement that says otherwise). This means that they are subject to equitable distribution during the divorce process. However, dividing a retirement account can potentially trigger adverse tax consequences under the Internal Revenue Code and Illinois’s state tax laws.
A qualified domestic relations order (QDRO) is a formal legal document that allows dividing a retirement account in a divorce without triggering adverse tax consequences. When divorcing spouses in Illinois obtain a QDRO, one or both spouses’ retirement assets can be divided, with a portion of the divided assets being transferred into the name of the non-earning spouse. This allows divorcing spouses to effect an equitable distribution involving the division of one or both spouses’ retirement savings without incurring early distribution penalties.
When Do You Need a QDRO During an Illinois Divorce?
So, when do you need a QDRO during an Illinois divorce? Generally speaking, divorcing spouses in Illinois will need a qualified domestic relations order whenever they decide to divide one or more retirement accounts (or pensions) as part of the equitable distribution process. As long as the spouses agree, obtaining a QDRO is generally straightforward, and the savings achieved by avoiding early distribution penalties are well worth it.
Regarding timing, the key is to ensure that you obtain a QDRO during the divorce process. You do not want to get to the end of your divorce and realize that you have made an oversight that will result in a substantial (and unnecessary) tax bill. An experienced divorce lawyer can help, and your lawyer can also help ensure that obtaining a QDRO is your best option under the circumstances at hand.
What Are the Alternatives to Obtaining a QDRO?
While obtaining a qualified domestic relations order and dividing retirement assets will make sense in many cases, this is not the only option that divorcing spouses have available. There are other ways to handle retirement assets in an Illinois divorce. For example, instead of dividing individual retirement accounts, divorcing spouses will often choose one of the following alternatives:
1. Keep Their Respective Retirement Savings
When both spouses have accumulated retirement savings over the years, they may choose to keep their respective retirement accounts after their divorce. This avoids the need for a QDRO and helps streamline the process overall (though obtaining a QDRO generally isn’t difficult). This works particularly well when the spouses’ retirement accounts are approximately equal. However, this approach can also be combined with the distribution of other marital assets when one spouse’s retirement savings are significantly more significant than the other’s.
2. Exchange Their Share of Retirement Savings for Other Marital Property
Another option available to divorcing spouses in Illinois is to exchange their right to retirement savings for the right to other marital property. For example, let’s say that one spouse has accumulated $200,000 in retirement savings, and the couple owns a vacation home with $200,000 in equity. Rather than obtaining a QDRO to divide the wage-earner’s retirement savings (and figuring out what to do about the vacation home), the couple could decide that the wage-earner will keep their retirement savings and the other spouse will keep the vacation home.
Remember: Equitable Distribution Only Applies to Marital Property
When deciding how to approach retirement savings in a divorce, it is essential to remember that Illinois’s equitable distribution rule only applies to marital property. Generally speaking, this excludes property owned before the date of marriage (although there are exceptions). So, if one spouse earned a portion of their retirement savings before the marriage, this portion may not be on the table during the divorce process. Thus, along with creating a comprehensive property inventory, it is also essential to ensure that all spouses’ separate and marital assets are appropriately characterized at the outset.
Ultimately, what makes sense for any spouse will depend on their circumstances. If you have questions about how you should handle your (or your spouse’s) retirement savings in your divorce, we can help, and we invite you to contact us for a confidential consultation.
Discuss Your Options with a Gurnee, IL, Divorce Lawyer in Confidence
Deanna J. Bown is an experienced Gurnee, IL, divorce lawyer who helps spouses carefully navigate all aspects of the divorce process. We invite you to contact us if you want to know more about obtaining a QDRO or the available alternatives. To confidently discuss your options with Deanna, please call 847-623-4002 or request a free initial consultation online today.
