How are retirement accounts divided?

Divorce lawyer's secret:  dealing with retirement assets in divorce is the easiest issue to deal with because all marital portions are divided 50-50 no matter what the spouses' incomes.

Retirement assets, like all others, are classified as being either marital or non-marital.  Marital parts of retirement assets are usually those sums that have accumulated since the date of the marriage.  So, if you had a 401(k) prior to the marriage, and the balance on the day you were married was $10,000 and now the balance is $100,000.  $10,000 of your 401(k) is considered to be non-marital, and $90,000 is considered to be marital.  Its the marital portion of your asset that the Judge will divide in the divorce.  

The gold rule of dividing all marital portions 50-50 has little exception, though spouses may agree upon some other distribution that makes sense to them and reaches an equitable result.  So, there are examples where one spouse will waive their right to 50% of the other's pension in lieu of receiving some other benefit (like all the equity in the house), if the arrangement is fair.  There are many scenarios that can address exceptions to the rule being mindful that these exceptions only take place about 1% of the time.

Retirement assets that are typically divided in this fashion are 401(k)s, 403(b)s, pensions of all kinds, IRAs, Roth IRAs, and other types of retirement assets.  Spouses shouldn't confuse these types of assets with non-retirement assets (like saving accounts, money market accounts, and stock), as those non-retirement assets are generally not always divided 50-50.  When the court allocates non-retirement accounts, the Court does look at the spouses' relative incomes as part of the overall consideration.  So, because these two types of assets are treated so differently, one shouldn't confuse one for the other.

All retirement assets can be allocated in a divorce without creating a taxable event (protecting you from having to pay taxes for the transfer), and are excluded from IRS penalties.  To achieve this special transfer, a specialized type of order is put together called either a QDRO (which is an acronym for Qualified Domestic Relations Order), or a QILDRO (which is an acronym for Qualified Illinois Domestic Relations Order).  Both of these orders should be prepared by a lawyer to satisfy various requirements which allow for the transfer without the IRS's involvement.  

QDROs and QILDROS are usually prepared and sent off to a retirement account plan administrator for approval.  Most retirement accounts have some sort of plan management that deals with the administration of the account, to include the processing of QDRO and QILDRO documents.  The approval doesn't allow the lawyer to then get the money for his or her client. Rather, the approval only tells the lawyer that the Order will be accepted after it's been signed by the Judge.  So, after most divorces, there is a secondary process where these QDROs or QILDROs have to be presented to the Judge for approval and signature.  Only then can the lawyer or spouse send a certified copy of the document to the plan administrator for processing and payment.  Some plans do not have an approval process, and you're throwing dice as to whether the form will be accepted, or if further work will be necessary to get the process done.

This secondary process (after your divorce) does get expensive from time to time, and the cost is highly dependant on how easy it is to get the draft order approved by the plan administrator and later approved by the Judge. Seasoned divorce lawyers know ways to save you money in this process.

If you have any other questions or concerns about this topic,
Please call Paul D. Nordini at (630) 306-6300
or email him at:  paul.nordini@divorceinfosite.com