Is 401k Marital Property in Illinois?

In Illinois, when a couple gets divorced, property considered “marital property” usually needs to be divided fairly between each person.

Marital property in Illinois refers to all property, including debts and obligations that either spouse acquires, during the marriage. In other words, anything you acquire after you tie the knot becomes marital property and may be divided equally.  However, Illinois is an “equitable division” state and in some instances, marital property may not be divided 50/50.

Even if a property is titled under only one spouse’s name, it may be considered marital property. This includes non-physical property such as stock options and retirement benefits. 

Some special types of property can be exempt from being considered marital property and may not need to be divided equally.

But how do you know exactly what is considered marital property in Illinois and what is exempt? 

From our team of Diamond Divorce lawyers right here in McHenry, here are some general guidelines that may help you figure it out.

Marital Property in Illinois

Illinois law considers marital property all property and non-physical property that either spouse acquires after marriage (and before divorce). This includes:

• Homes
• Debts and obligations
• Life insurance policies
• Stock options
• Bank, brokerage, and investment accounts
• Furniture and vehicles
• Partnership and business interests
• Pensions and retirement plans
• Pets 

There are exceptions to the rule, including inheritances and gifts to a spouse.  Keep in mind, however, that in the event of a divorce, these assets will be taken into account by the court, with other factors, when the court considers equitable division, and the court must fairly divide the marital property.

Is 401k Marital Property?

Your IRA, pension, retirement plans, and 401ks that are obtained after the date of marriage, or that you owned prior to the marriage and contributed to during the marriage, are usually considered marital property in Illinois, although they may retain some non-marital characteristics.

In the case of a divorce, a fair division of your assets is critical. If you live in Illinois and you are contemplating a divorce, your soon-to-be ex-spouse may have the right to claim, and receive, part of your retirement savings, even if they never contributed to your plan.

The entire value of a retirement savings plan opened after a couple got married will be marital property.

If one spouse participated in a retirement plan before the marriage and continues to contribute to it after getting married, the contributions and the value accumulated during the marriage will also be considered marital property.

Evaluating what part of the retirement asset is marital or nonmarital can be confusing. Plans such as 401ks or IRAs have defined contributions. Hence, the divorce court judge can designate nonmarital and marital portions after reviewing statements from when the account was opened.

With regard to pensions and some retirement plans, the retirement fund management company will determine the marital portion (the exact dollar amount that is marital) using the date of the marriage and the date of judgment for divorce. A Qualified Domestic Relations Order (QDRO) is a form that is issued by the retirement fund using actuarial software and is ultimately filed with the court.

If you are going through a difficult divorce in Illinois, you may want to discontinue contributing to your retirement account during the divorce. Any deposits you make to your retirement plan during the divorce, until it is finalized, become a marital asset. 

It’s important to note that one way to keep your ex-spouse from obtaining any part of your 401k is through a prenuptial agreement. Don’t panic if you didn’t consider creating this agreement. You can still create a postnuptial agreement that excludes your spouse as a partner in your retirement plan.

Finding a qualified and experienced divorce lawyer in McHenry, IL to draft a postnuptial agreement will help you settle your affairs and assets in the event of a divorce or a separation.

The Importance of Keeping Records

Even if you are not considering a divorce in the future, keep accurate records of your retirement plan’s funds, before and after your marriage.

Keeping this record is important because you might have earned some parts of that plan before getting married. The divorce judge will assign this nonmarital part to you, and your spouse will not receive any part of the plan you earned before your marriage.

The best way to protect these funds from your ex-spouse is through keeping accurate records that show detailed growth of your retirement plan before your marriage. If your retirement plan allows you, you may want to withdraw funds and spend the money in the plan. If you do this, it would be best to get tax advice from an accountant or tax preparer to make sure you understand the potential income tax consequences of taking money out of your plan.

Again, working with an Illinois divorce lawyer will help make this process easier as they walk you through understanding the difference between your marital and nonmarital assets and organizing your paperwork and records.

What are the Risks of dividing a 401k in Divorce?

401k plans have strict regulations regarding early withdrawals. Failure to follow these rules will result in early withdrawal penalties from the administrator and taxation from the Internal Revenue System (IRS).

A Qualified Domestic Relations Order (QDRO) must be in place to avoid the penalties resulting from early withdrawals from a retirement account.

A QDRO refers to a court order that instructs how the retirement plan administrator should carry out the division. For public employee pensions, you need a Qualified Illinois Domestic Relations Order or QILDRO. Both these documents are highly technical and must comply with all state and federal laws.

Working with an experienced divorce lawyer is essential when dealing with IRAs and 401k’s during your divorce to ensure a fair settlement.

Tips to Follow when Dividing a 401k in Your Illinois Divorce

Unfortunately, some people still lose money even when they follow all the rules of a plan.

For instance, you may lose money from any gains or losses in the 401k if the divorce order uses a percentage for dividing the account, instead of an exact dollar amount.

You may experience several pitfalls while dividing your 401k plan at the time of your divorce. However, here are a few tips that can help you mitigate the risks.

• Hire an experienced divorce lawyer who understands the regulations of a qualified domestic relations order (QDRO)
• Never attempt dividing the account on your own
• Divide the account using an exact dollar amount instead of a percentage
• Review the QDRO with your attorney before you submit it to the court
• Avoid penalties and taxes by rolling the account over instead of making withdrawals from the account
• Ensure the divorce decree matches all information on the QDRO
• Complete a separate QDRO for each retirement account
• Let your spouse pay the penalty fees if he/she wishes to receive a disbursement directly from the account

Contact Diamond Legal for help with your case

If you want to know more about how you can divide 401k at the time of your divorce, get in touch with experienced McHenry, IL divorce lawyers. Our legal team at Diamond Legal can help you settle the division of your marital assets, such as 401k, and any other divorce issues you may be having.

DISCLAIMER: Any information contained herein is solely for informational purposes. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, we urge you to contact a local attorney for advice pertaining to your specific legal needs.