There are many uncertainties involved in getting a divorce. Unless you and your spouse agree on specific terms for asset division and other issues via a prenuptial agreement, uncontested divorce or negotiated terms, the courts will end up making the major decisions. Since every marriage and every divorce is unique, it’s impossible for anyone to accurately predict the exact outcome of your divorce.
However, a review of state law and common practices can help you understand the likely outcome of certain aspects of your divorce. One issue that particularly concerns divorcing couples aged 40 or higher is the potential impact of the divorce on retirement accounts. The larger and more complex the assets you’ve acquired during marriage, the more uncertainty there may be about their allocation in a divorce. Certain rules and practices, however, will guide the court’s decision-making process.
You can expect reduced overall assets for your retirement
Illinois courts strive for equitable and fair distribution of marital assets in any divorce. Generally speaking, any income or other assets acquired during marriage will be marital property. Gifts, inheritances and possessions or assets from before the marriage typically remain separate property, not subject to division. However, any amount you placed in a retirement account during marriage usually belongs to both you and your spouse.
While equitable division does not inherently mean a 50/50 split, you should expect to share about half of your assets with your spouse, regardless of who made more money or whose name is on the retirement account. Basically, the amount you planned to use to support a joint household will now need to support two separate retirements.
You will also likely invest a good amount of money in the divorce process, which can cost thousands of dollars. That means that you will have fewer assets to fund your retirement. Depending on your age and circumstances, working a few extra years could offset those losses. Otherwise, you may need to consider changing your retirement plans.
Court-ordered division of retirement accounts eliminates penalties
If there’s a silver lining to the likelihood of splitting up your retirement funds, it’s that you don’t have to worry about taxes, fees or penalties. Most traditional retirement accounts, such as 401(k) or Roth IRA plans, impose financial penalties on anyone who withdraws money from the account before actual retirement.
When the courts order the division of a retirement account or pension, they typically do so using a Qualified Domestic Relations Order (QDRO). This document goes to the manager of the account or fund. It provides the name of the spouse receiving some of the assets, as well as a percentage of the account for the split. The manager makes a new amount and transfers the funds, all without incurring any kind of financial penalty for you or your spouse.