How to divide pensions in a divorce
Negotiating how to divide property in a high asset divorce can be a complicated matter. It is especially complex when it comes to dividing retirement assets.
Pensions, such as an IRA or a 401(k), are often some of the most significant assets you own. You start adding funds the day you begin working, so you can settle down after retirement.
Since it is their own money going into your retirement account, many people think they have a right to their pension in a divorce. However, retirement assets are marital property. Any savings added to your retirement after marriage are subject to division in a divorce.
Valuing and dividing different pensions
Since Illinois is an equitable distribution state, an accurate valuation of your retirement assets is necessary to properly and fairly divide your pension.
You can roughly estimate the total value of your pension by calculating:
- Your age now
- The projected age of retirement
- Your current and future income
- Annual savings in your pension
There are many types of retirement savings, and different processes for dividing them. Some of the most common pensions divided in divorces include:
- Roth IRA: When dividing an IRA, you can transfer ownership of your assets to your spouse, as you might do with a trust. Transferring the assets can help you avoid steep taxes after a divorce.
- Annuities: There are various ways to divide an annuity. You can transfer ownership like an IRA, or take funds directly from the account to divide between spouses.
- 401(k): To divide a 401(k), you must obtain a qualified domestic relations order (QDRO) because employers provide this retirement plan. After that, your spouse can receive their portion of the pension to their own retirement or in a cash payment.
What is a QDRO?
A QDRO is an order provided by the court or other state agency. Essentially, the document gives the right to receive payments from a pension to an alternate payee, or the spouse who does not own the retirement account.
It also outlines instructions of how to divide the assets and benefits in a retirement plan. Like child support or alimony agreements, a QDRO is the official negotiation of pension division.
Protecting your finances and your future
During a divorce, your main concerns usually revolve around your family, your children and your future. However, the security of finances is often another source of anxiety for divorcing spouses. This can overlap with your concern for your family, as your finances help you care and provide for them.
Dividing retirement assets may seem counter intuitive to protecting your finances. However, fairness is at the basis of the equitable division of property. There is no winner or loser in property division. The goal of dividing assets, like retirement pensions, is to maintain financial stability for both spouses as they move into their futures after a divorce.