Illinois couples who are getting a divorce might need to divide one or more retirement accounts as part of the process of property division. However, they should be aware of any taxes or penalties associated with the accounts. These differ and have different requirements based on the type of account.
A qualified plan such as a 401(k) will require a document known as a qualified domestic relations order. This allows the account to be divided without being taxed. It also prevents a penalty of 10 percent for early withdrawal.
The situation is different for a nonqualified retirement plan. A QDRO is not required for an IRA or another nonqualified retirement plan to allow for a tax-free division of the account. Whether or not the couple does use a QDRO for a nonqualified plan, however, there will still be a 10 percent early withdrawal penalty for people younger than 59 1/2, unless certain formalities are followed. One is that a participant’s “interest” in the plan is transferred to the estranged spouse, and that it is made pursuant to a divorce that qualifies under Section 71(b) of the Internal Revenue Code.
When people are negotiating property division, they may decide that rather than dividing retirement accounts and other assets, they will simply each take assets of roughly equal value. However, they should make sure they understand the value of any assets including how taxes how reduce the value of some retirement accounts. The house can be another common pitfall. People may not realize how difficult it can be to keep up with the mortgage, insurance, taxes and upkeep on the home with a single income. They might want to resolve these issues through negotiations with the help of their respective attorneys.