How Are 401Ks, IRAs, and Pensions Handled During Divorce?

 Posted on August 30,2021 in Divorce

When a couple chooses to get a divorce, they will need to address multiple issues related to their property and finances, as well as any other legal matters involved in the end of their marriage. Determining how to divide marital property can sometimes be complicated, especially for couples with a high net worth. However, couples at all income levels may need to determine how to address financial assets such as retirement accounts and pensions. To ensure that these assets will be considered properly and that their interests will be protected, a spouse can secure representation from a divorce lawyer who has experience addressing this issue. 

Division of Retirement Benefits

Spouses may own multiple types of retirement benefits, including money saved in retirement accounts or pension benefits that a person will receive after they retire. If contributions were made to a retirement account during a couple’s marriage, or if a spouse earned pension benefits while married, these assets will need to be considered when dividing marital property. 

Depending on the terms of a couple’s divorce settlement, the funds in a retirement account may be divided equally between spouses, or a certain percentage of the balance of an account in one spouse’s name may be transferred to the other spouse. However, spouses will generally want to avoid making simple withdrawals from these accounts. Doing so before they reach the applicable retirement age will result in penalties, and they will also be required to pay taxes on the amount they receive. For employer-sponsored retirement accounts such as 401Ks, a spouse can use a qualified domestic relations order (QDRO) to withdraw and transfer funds without being subject to penalties, and taxes will not be charged on the withdrawn funds as long as the other spouse deposits the amount into their own retirement account. For individual retirement accounts (IRAs) created separate from an employer, a spouse can use a “transfer incident to divorce,” which will function the same as a QDRO.

A QDRO can also be used to divide pension benefits between spouses. However, the amount that a spouse will receive in benefits will usually not be known until they retire, so in these cases, a QDRO usually will not specify a certain amount that the person’s ex-spouse will receive. Instead, the QDRO will state that the ex-spouse will receive a certain percentage of the pension payments. This percentage may be calculated based on how long the couple was married while the spouse was earning pension benefits. For example, if a couple was married for 15 years, and the spouse worked a total of 30 years, half of the pension benefits may be considered marital property, and the other spouse may receive half of this amount. In this case, a QDRO would state that the ex-spouse would receive 25 percent of the pension payments. Once a spouse retires, the QDRO will be sent to the pension plan administrator, instructing them to pay the appropriate percentage of benefits to the person’s ex-spouse.

Contact Our DuPage County Retirement Asset Division Lawyers

If you or your spouse own retirement accounts or earn pension benefits, Farooqi & Husain Law Office can help you make sure these assets will be addressed correctly during your divorce. Contact our Oakbrook Terrace property division attorneys by calling 630-909-9114.

Sources:

https://www.investopedia.com/articles/retirement/03/060403.asp

https://www.investopedia.com/articles/retirement/072916/how-protect-your-pension-divorce.asp

https://www.thebalance.com/what-s-a-qdro-2894206