Can Retirement Assets Be Divided?
Yes and absolutely. Generally most assets are divided using a Qualified Domestic Relations Order (QDRO), however that's not always the case.
If you're looking to divide an IRA, then generally most IRAs can be divided in the divorce with a "Letter of Direction." This directive forces the plan administrator of an IRA to transfer a set amount of money from one IRA to the other spouse's IRA. There is no need for additional court dates or motions. The letter of direction is usually signed by both spouses at conclusion of their divorce and the money to be transfered complies with the terms of the divorce decree.
401(k)s and 403(b)s are usually divided using a QDRO. QDRO's are carefully controlled by Federal Law and they are a specialized type of Court Order with a fairly convoluted process for their processing. The basic steps involve determining how much is going to be divided. Usually the divorce decree will equally divide the marital portion, which is the portion attributed to the marriage (from the date of the marriage to the date of the divorce).
Then QDRO is then prepared to comport with the divorce decree and submitted to the plan administrator to review and either approve the QDRO or reject the QDRO noting revisions that would be necessary to attain approval. There's no firm time frame for this approval process, but the plan administrator is allowed 90 days to approve or reject a draft. Once the QDRO is approved, your lawyer will prepare a motion and set a court date for the Judge to review the QDRO to make certain that it complies with the dollar amount in the divorce decree. The Judge then signs the QDRO and it's sent back to the plan for processing.
Illinois Pensions (teachers, firefighters, and police) can also be divided with a QILDRO, which is a little different than a QDRO. QILDRO stands for Qualified Illinois Domestic Relations Order. It’s also a special kind of court order that gives a right to receive a portion of an Illinois state employee’s retirement benefits.
It’s similar to a QDRO, but a QILDROs is required for pensions tied to Illinois public employees—such as teachers, police officers, or state workers. Regular QDROs don’t apply here.
Also, QILDROs don’t operate the same way as QDROs. While a QDRO divides and distributes a 401(k) shortly after divorce, a QILDRO usually won’t pay out until the employee retires—which could be a number of years into the future, if not decades.
The basic steps for a QILDRO are different as follows: Similar to a QDRO, the QILDRO is prepared and the plan must approve the draft. Once approved, it's entered by the Judge and served on the plan administrator. Current contact information of the recipient of funds is given to the plan for later use. Then years later when the pension owner is about to retire, the plan sends notice to the former spouse who is suppose to receive their share pursuant to the divorce decree. With this notice, the former-spouse's attorney then prepares a "Calculation Order" that shows how much of the pension the former-spouse will receive and that too will be presented to the Judge. The Calculation Order is then forwarded to the plan for processing and the retiree and former-spouse start receiving their relative share of the pension.
Because QDROs and QILDROs are complex and may depend on future events (like retirement or death), some divorcing couples choose to avoid them entirely by offsetting other assets.
Instead of dividing a pension, one spouse may keep the pension while the other receives the marital home if they are similar in cash value. Or spouses offset the values of their respective retirement accounts.
One of the most common mistakes within a divorce is when a spouse or their lawyer fail to properly assign a cash value to a retirement account offset. For example, every dollar of a retirement asset may only be worth 70 cents against a dollar of house equity. That's because it will cost a spouse 30 cents (in taxes) to convert retirement money against house equity.
So, if you wanted to offset $100,000 of a 401(k) against the house equity, a fair trade would be trading $70,000 from the house (which is essentially cash) for $100,000 of the 401(k), which his how much it would take to turn the 401(K) into $70,000 of cash.
The bottom line on this topic is that you should consult with a lawyer because of the convoluted nature of dividing retirement assets and the complexities involved when dealing with the IRS and the Internal Revenue Code on these types of transfers.
Call and speak with Paul D. Nordini today to discuss how pensions and retirement accounts are divided in a divorce.