Things to keep in mind when dividing a retirement account

On Behalf of | Mar 12, 2018 | Uncategorized

Couples in Illinois who need to divide a 401(k) or company pension plan will need to use a document known as a qualified domestic relations order. Otherwise, they may have to pay high taxes and early withdrawal penalties. A QDRO should be prepared by an attorney in consultation with the plan administrator.

It is important for the QDRO and divorce agreement to be consistent. To that end, the order should specify how distributions will be made. While most people prefer to roll distributions into a retirement account, they can also take a direct distribution. A divorce is considered an exception to the restriction on taking distributions before the age of 59 1/2 without incurring a penalty. However, people will still owe regular income tax on whatever they receive.

There are a few potential pitfalls that recipients should watch out for. The amount they will receive should be specified using percentages and not dollar amounts since the value of the account can change. A spouse should also not agree to be removed as a 401(k) beneficiary before the divorce is final. Otherwise, the spouse would receive nothing if the partner died prior to the divorce. Furthermore, couples should be aware of the proper procedures for dividing an IRA, which does not require a QDRO.

There may be other complex aspects to property division as well. For example, debts must be divided as well as assets. Dividing a home may also be complicated. Even if the couple agrees to sell the home and the split the proceeds, this process could take time and leave the couple tethered financially for longer than they prefer.


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