RETIREMENT ACCOUNTS AND DIVORCE IN ILLINOIS

RETIREMENT ACCOUNTS AND DIVORCE IN ILLINOIS

When splitting retirement accounts in a divorce, special procedures should be taken to avoid unnecessary taxation.

A divorce can touch every single part of a person’s life. It may seem that nothing is left unchanged and many losses are encountered when a marriage must end. Illinois residents who have experienced divorce themselves know this all too well. People must often move to new residences, lose time with their children, give up special belongings and more.

THE BUSINESS OF DIVORCE

From a financial perspective, divorce is something of a business transaction. Assets and debts are often split between both spouses in some form. This includes the splitting of pension funds, IRAs, 401k accounts and other retirement assets. Even though these funds are held in one spouse’s name, they are often considered marital property. Illinois law generally treats assets obtained after a marriage has commenced as joint assets and subject to property division in a divorce.

PROTOCOL MUST BE FOLLOWED

Couples with retirement accounts, such as pensions or 401(k) accounts, can face different and complicated problems during the divorce process. Unlike other items in a property division settlement, there are some very specific procedures that must be followed when dividing retirement assets. If divorcing couples fail to take the proper steps, they can face the unpleasant reality of very high tax assessments on their retirement savings. This essentially wipes out a large part of fund values.

Following is some specific information to consider when dividing retirement accounts in a divorce:

No transfer of funds should be made until the divorce is completely final. If a transfer is made before this time, 10 percent of the fund’s assessed value could be gone in the form of an early withdrawal penalty.
When splitting a fund, the beneficiary should be updated as well.
All division of assets should be made in percents, not in dollar values. This protects both parties when the market changes.
The divorce decree must clearly stipulate the division to take place.
Specific verbiage or process to be used will depend upon the type of account to be split. A transfer incident to divorce should be used for Individual Retirement Accounts whereas a Qualified Domestic Relations Order should be used for 401(k) and 403(b) accounts.

Special tax forms will need to be filed if any fund contributions were made with non-deductible monies. For IRAs, taxes on future distributions will be the responsibility of the receiving spouse.

PROFESSIONAL ADVICE IS IMPORTANT

The delicate nature of these transactions highlights the importance of professional input. Anyone facing a divorce in Illinois should consult with an experienced attorney to help protect valuable assets.

Keywords: divorce, property, assets, division