Courtney ∙ Clark Law, P.C.Courtney ∙ Clark Law, P.C.
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It's important to handle retirement accounts properly in divorce

Other than the family home, the largest asset that most Illinois couples share is a retirement plan. You may have spent your career amassing enough in that plan in anticipation of the years in which you won't have to work. You and your spouse may have even discussed how to spend those years together.

Then, at some point, your marriage took a turn for the worse. You and your spouse decided that a divorce is the best course of action. In addition to dividing all of your other assets and possibly deciding custody issues, you need to divide your retirement plan.

If you have 403(b) or a qualified retirement plan

Retirement plans obtained through employment allow you to save money for retirement on a tax-deferred status. As long as you don't make any withdrawals until a certain age, you avoid the penalty tax. However, if you are in the midst of a divorce in which your retirement plan is subject to division, you could end up paying that penalty, along with other taxes. That is, unless you have a qualified domestic relations order.

A QDRO is an order executed by a judge that allows you to transfer funds to your ex-spouse without incurring that penalty. You may want to talk to your plan administrator first, however. Many plans have their own requirements that need to be included in the order. In fact, some plans provide a form, but you may want to review it carefully before using it since it may not cover all of your needs.

If you have an IRA

IRAs also allow you to put away money for retirement without paying taxes on it. You could also incur a penalty for early withdrawals on these accounts. A QDRO won't work in this case, however. Instead, your divorce agreement needs to indicate that the division of the IRA is a "transfer incident to divorce." This keeps you from owing any taxes on the transfer. What your spouse does with the money after that the transfer is completed will not be your responsibility.

If you want to make sure it's done right

It is possible to avoid the tax ramifications of dividing your retirement plan, but it needs to be done right. Even neglecting to add the right wording to a QDRO or your divorce agreement could result in you unnecessarily paying taxes and penalties. You may benefit from taking steps to ensure that does not happen.

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Courtney ∙ Clark Law, P.C.
104 South Charles Street
Belleville, IL 62220

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