Getting divorced in Illinois can be costly. If people are not careful, they may also make mistakes that could potentially prevent them from retiring later in their lives. It is important for people to understand the mistakes that they should avoid.
In order to pay the legal fees associated with divorces, some people decide to make withdrawals from their retirement accounts. Accounts such as 401(k)s and IRAs are taxed upon withdrawal, meaning that people will pay taxes on the money that they pull out. If they are younger than 55 for 401(k)s or 59 1/2 for IRAs, they will also have to pay 10 percent early withdrawal penalties.
Some people do not know how to properly value their retirement accounts when they are trying to decide how they should be divided. Accounts that have equal amounts in them but that are different types might be worth different amounts. For example, if a Roth IRA has a balance of $150,000, it will be worth $150,000. If a 401(k) has a balance of $150,000, it will be worth that amount less whatever the recipient’s tax rate might be, making it worth less.
People must also understand the paperwork that they will need to file in order to avoid being taxed by the IRS for dividing retirement accounts pursuant to their divorces. They also should understand the timing and how the transfers are supposed to be done. An experienced family law attorney may guide clients through the asset division process so that they avoid the potential tax consequences. The attorney may also advise clients about how they might plan for their retirement post-divorce. During the property division negotiations, the lawyer may work to protect the clients’ interests.