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How divorce effects retirement accounts and the use of a QRDOs

If you are seriously thinking about getting a divorce in Illinois, you likely have a lot of questions about the potential outcome of the divorce. Unless you have an ironclad prenuptial agreement, however, there is very little that anyone can accurately predict about the outcome of a divorce.

You may worry about your spouse hiding assets, who will get to keep the house or how the divorce will affect your retirement. If the courts have to make key decisions about how to divide your assets, you will have very little control over the end results of your divorce. That can feel frightening to many people.

The goods news is that the courts in Illinois strive for fair and equitable distribution of your marital assets. Even if there were severe issues in the marriage, like infidelity, that will generally have less of a bearing on the asset distribution process than the length of the marriage and your contributions to the marriage, even if they were unpaid contributions in the home. Understanding state law can help you know what to expect, particularly when it comes to your retirement.

Divorce, especially late in life, impacts your retirement

Even if you and your spouse have substantial assets, a divorce could have a very real impact on your retirement. There are several factors to consider. First of all, many people end up using savings or investments they had set aside for retirement as a means of paying for divorce. That can impact your standard of living in divorce or necessitate working for a few additional years before divorcing.

Secondly, you will probably have to split your retirement accounts and even your pension with your spouse. Typically, the courts will consider contributions made during your marriage marital property, meaning they belong to both spouses, regardless of whose name is on the account. That could mean retiring with half the amount you had planned, while needing to support an entire household with that reduced amount of funds.

Court orders, called QDROs, help you avoid penalties

Most everyone who has a retirement account, whether it’s a 401(k) or a Roth IRA, knows there are tax penalties, fines and fees associated with withdrawing money from the account early. You may worry about how a divorce-related split will impact your retirement savings. The good news is that if you have a court order to divide the account, you won’t incur any fees or penalties.

A qualified domestic relations order (QDRO) issued by the court will typically provide the name of spouse receiving a split of the assets in the account and a percentage. The fund manager will follow the instructions provided in the QDRO to deposit a percentage of the total value of the retirement account into a new account in the other spouse’s name without any penalties or fees.