Protecting Your Retirement in Divorce

August 6, 2024

Divorce is a life-altering event that can significantly impact your financial future, especially your hard-earned retirement savings. In Illinois, the equitable distribution law dictates that assets are divided fairly, which doesn’t always mean a 50/50 split. This can leave your retirement accounts vulnerable, but with proactive planning and the right strategies, you can protect your retirement in divorce.

Navigating Retirement Assets in an Illinois Divorce

In most cases, retirement accounts like pensions, 401(k)s, and IRAs are considered marital property in Illinois. This means they are subject to division during a divorce. Let’s break down the key considerations for each type of account:

  • Pensions: Understanding the terms of your pension plan is crucial. Both vested and unvested benefits (those you’ve earned a right to, even if not yet receiving them) can be divided. Seek guidance from a financial professional or attorney to accurately assess your pension’s value and determine the best approach for protecting your share.

 

  • 401(k)s and IRAs: These accounts are also typically subject to division. A Qualified Domestic Relations Order (QDRO) is a legal document that outlines how these assets are to be split. While QDROs can be costly, they offer tax advantages and ensure a proper division of your retirement funds. In some cases, accounts can be rolled over from one spouse to the other without a QDRO.

 

  • IRAs and Roth IRAs: Contributions made to IRAs and Roth IRAs with after-tax income are also considered marital property and may be divided.

 

Proactive Steps to Protecting Your Retirement in Divorce

  1. Gather Information: Collect statements for all your retirement accounts, as well as any held by your spouse. Knowing the total value is essential for negotiations and ensuring a fair division.

  2. Consult a Financial Expert: A Certified Divorce Financial Analyst (CDFA) can provide invaluable insights into your retirement landscape. They can help you assess the long-term impact of different division options, explore tax implications, and develop strategies to protect your financial future.

  3. Consider Asset Trades: Negotiate with your spouse to offset the division of retirement accounts by accepting other marital assets of equal value. For instance, you might keep your 401(k) while your spouse retains the marital home or other valuable assets.

  4. Factor in Taxes: Be aware of the tax consequences associated with dividing retirement accounts. Early withdrawals from certain accounts can trigger penalties, so it’s important to understand the financial implications of your choices.

  5. Protect Future Contributions: To ensure your future retirement savings are secure, consider opening a new retirement account in your name immediately. This protects any contributions you make after the divorce is finalized.

Additional Considerations for Protecting Your Retirement in Divorce

 

  • Social Security Benefits: If your marriage lasted ten years or more, you might be eligible to receive a portion of your ex-spouse’s Social Security benefits. It does not reduce how much the other person gets.

  • Prenuptial and Postnuptial Agreements: These agreements can outline how retirement assets are to be handled in the event of a divorce. If you don’t have one, consult an attorney to explore whether it’s a viable option for protecting your assets.

Don’t Wait to Protect Your Future

Taking proactive steps to safeguard your retirement is crucial during a divorce. Don’t leave your financial future to chance. Start early, seek guidance from experienced professionals, and communicate openly with your attorney about your retirement goals.

Navigating Your Divorce Journey

Divorce can be overwhelming, but remember that you’re not alone. I can guide you through the legal complexities, advocate for your interests, and help you achieve a fair and equitable resolution. If you’re facing an uncontested divorce in Illinois, I invite you to reach out to my office or call me  to learn more about my services and how I can support you during this transition.

Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. It is essential to consult with an attorney to discuss your specific situation and legal options.