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Alternatives to dividing a 401(k)

Before you come to a property division agreement with your spouse, you will need to list your assets and their value, and that includes your retirement accounts. The balance of the account may not all be marital property, though, if you owned the account before you married. Those may be separate property that is not subject to division.

According to Zacks Research, determining the amount that you need to divide and then navigating the rules for division can be complex. Taxes, fees and penalties may reduce the value of your accounts. Is there an alternative that protects your retirement savings?

Agreeing to keep individual accounts

If your spouse also has a retirement account, and the amount is roughly the same as your own, the two of you may agree to each keep your accounts intact and call it fair. A judge will likely agree with you in this case and sign the order because Illinois is an “equitable division” state. The courts frown on agreements that appear significantly imbalanced or that leave one spouse without enough assets or income to self-support.

Giving up other assets

You may want to give up assets in favor of keeping your retirement account whole. Trading your spouse’s portion of your retirement account for your portion of the equity in the family home is one common agreement option.

Opting for an IRA

Individual retirement accounts do not have the same restrictions and penalties as 401(k)s and other types of retirement plans. Depending on the rules and restrictions of your plan, you may be able to roll it over into an IRA and avoid most of the fees when you divide the money with your spouse. You will likely still have a penalty, but it may be much less costly.