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How do you divide retirement accounts in a divorce?

If you and your spouse have decided to end your marriage, you are probably not looking forward to the property division phase of the divorce proceedings.

One concern is the matter of retirement accounts. Illinois is an equitable division state. How will the court divide these accounts?

QDRO and correct distribution

A Qualified Domestic Relations Order, or QDRO, is a legal document that comes into play with the division of a retirement account. The QDRO ensures proper distribution of the funds in your 401(k) to a spouse, former spouse or dependent. It also keeps taxes and penalties out of an early distribution process. Every pension or company-sponsored retirement plan requires its own QDRO. An individual retirement plan must have a transfer incident, another vehicle for moving funds tax-free.

Rolling over

You have options for rolling retirement distributions into your own retirement plan. You can do this by cashing out, asking for a direct transfer or deferring the process of taking a distribution until the account owner retires. Whatever you decide, remember to update your beneficiary designations. Otherwise, your soon-to-be-ex may continue to appear as a beneficiary. Given the impending divorce, you may not want that.

Illinois courts

In an equal distribution state like Illinois, the court weighs in to create a fair division of retirement accounts. Be aware that the court will consider the length of your marriage, the financial condition that applies to both you and your spouse and your ability to continue earning income.

Tax consequences

There are different tax consequences with different types of retirement accounts. For example, you make pre-tax contributions to a 401(k), a 403(b) or a traditional IRA. However, you pay income tax before making your contribution to a Roth IRA. Taking funds out may come with different tax implications.

Moving forward

You may feel somewhat overwhelmed by the rules involving the division of retirement accounts, but do not despair. You can rely on legal guidance to ensure there are no missteps regarding this aspect of property division in your divorce proceedings.

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