There will be big changes in the future once you decide to end a marriage. Among the many things to consider if you or your spouse have filed for divorce is what this means for your retirement.
Illinois is an equitable distribution state, meaning the courts will divide eligible assets between two parties fairly and equitably. This may include the couple’s property, wealth, and investments, such as retirement accounts and pension plans.
The question is: are retirement accounts eligible for equitable distribution in a divorce?
Marital property vs non-marital property
According to the law, only marital properties are subject to division. Non-marital property can include the following:
- Property that either of you purchased before the marriage
- Gifts or inheritances to one person
- Property either person acquired after being legally separated
- Specific property excluded as part of a prenuptial or postnuptial agreement
On the other hand, marital property is anything earned, purchased or acquired during your marriage and is typically subject to equitable distribution. This can include retirement accounts and pension plans acquired while married.
Challenges of dividing retirement assets
Numerous challenges come with dividing retirement accounts, like penalties for early withdrawal. However, there are also strategies to minimize these penalties. For instance, Illinois residents with 401(k)s can get a qualified domestic relations order (QDRO) to allow half of the funds to go to the other spouse to avoid taxes and penalties.
Again, dividing retirement accounts and assets in general can be tricky and tedious. One way to avoid the messy ins and outs of financial management in a divorce is to have a prenuptial or postnuptial agreement. This way, you can have control over the process and may even avoid court.
Another option to ensure a smoother divorce is to have the right people on your team. Aside from working with an experienced legal professional, you can also have a financial planner to help with the budgeting and retirement planning and a forensic accountant to make sure there is no hidden money elsewhere.
