Retirement benefits can be one of the most complicated – not to mention hotly contested – aspects of divorce. You've spent a lifetime working for something only to face giving a sizable portion of it to your ex. Figuring out how much she is entitled to sometimes involves a complicated formula best left to professionals. Although you can typically establish the value of a defined contribution plan such as a 401(k) from statements, pensions and annuities require complex calculations by an accountant or lawyer who specializes in this area of divorce.
Marital Settlement Agreements
Most state courts – including those in Illinois – prefer that spouses iron out their own issues rather than rely on a judge to do so for them at trial. If you can reach a deal regarding division of your retirement benefits, you or your attorney can draft a marital settlement agreement that includes the terms. After signature, you can submit the agreement to the court. If the judge approves it – and this is usually the case unless it's grossly unfair to one of you – he will incorporate it into an Illinois order for dissolution of your marriage. The terms of your agreement are just as binding as if a court had ordered them.
Under Illinois law, the marital portion of your retirement benefits is what you accrued or earned after the date of your marriage. Division of these plans typically requires a qualified domestic relations order. Your settlement agreement should provide for the QDRO, a document which details how your plan administrator will pay out your spouse's portion and which allows diversion of your benefits to someone other than you. With many plans, your administrator will issue payments to both you and your spouse at the time of your retirement. You must usually submit your QDRO to your plan administrator after your divorce is final, along with a copy of your dissolution order. If the plan administrator approves the QDRO, you can send it to the judge for signature, then return it to your administrator. IRAs are one of the few retirement plans that don't require QDROs.
Special Illinois Plans
Retirement plans governed by the Illinois Pension Code require a document similar to a QDRO but more specialized. These plans include those provided to state employees, teachers, firefighters and police. Qualified Illinois domestic relations orders or QIDROs require additional steps and they have some limitations. For example, they can't assign survivor benefits. If you work in one of these fields, speak with an attorney to find out how this might affect your marital settlement agreement.
Some – but not all – retirement plans allow a spouse to take her share of benefits in cash at the time of the divorce, rather than waiting until the participating spouse retires. If your ex elects to do this, the option doesn't come without penalties. Neither you nor she would be liable for the usual 10 percent penalty for withdrawals made before age 59 ½, provided the withdrawal is made according to the terms of a QDRO or divorce decree, but she would owe taxes on the proceeds in the year she takes them. Such disbursements are subject to 20 percent mandatory withholding. This doesn't apply, however, if she rolls over the proceeds into a retirement plan of her own.
Offsetting the Asset
You can avoid the expense and trouble of a QDRO or QIDRO if your spouse is willing to accept other marital property in exchange for a portion of your retirement benefits. Offsetting the marital portion is a common way of doing this, and you can provide for such an arrangement in your marital settlement agreement. For example, if your ex's share of your retirement benefits is $100,000, and if you have $200,000 in equity in your marital home, you can transfer ownership of the home to her without taking the $100,000 share of the equity you would normally be entitled to.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.