HOW RETIREMENT ACCOUNTS ARE SPLIT DURING DIVORCE

Retirement plans are a common asset that must be divided in the dissolution of marriage process. There are different types of retirement accounts and there are different ways to divide those accounts.

QDRO:

If you are looking to divide a private retirement account like a 401(K) in your divorce, a Qualified Domestic Relations Order (“QDRO”) will likely be the way to divide it. A QDRO is an order from the court that creates or recognizes the existence of an alternate payee’s (the former spouse) right to receive a portion of the benefits payable with respect to a participant (the working spouse) under a retirement plan. A QDRO will be entered by the court if a working spouse has a private retirement plan. A QDRO must clearly specify certain facts including the name and last known mailing address of the participant and the name and mailing addresses of each alternate payee covered by the order, the amount or percentage of the participant’s benefits to be paid by the plan to each alternative payee or the manner in which the amount will be determined, the number of payments or period that the order applies, and each plan to which such order applies. The QDRO may not award any amount or any form of benefit that is not under the retirement plan. A QDRO is governed by federal law. See 26 U.S.C.A § 414

QIDRO:

A Qualified Illinois Domestic Relations Order (“QILDRO”) is another way to divide a spouse’s retirement account during a divorce. Although similar to a QDRO, they are not the same thing. A QILDRO is specifically for retirement plans which are Illinois Public Retirement accounts, and thus if your spouse works for the state of Illinois and has a public retirement account, then you will need a QILDRO to get your portion in the divorce. Like a QDRO, a QILDRO is a court order that creates or recognizes the existence of an alternate payee’s right to receive all or a portion of a member’s accrued benefits in the retirement system. In re Marriage of Winter, 387 Ill.App.3d 21, 33 (2008). However, a QILDRO is only pursuant to an Illinois Court. See 40 ILCS 5/1-119. The QILDRO law was first enacted in 1999 but has been amended since first enaction.

IRA:

If a spouse has an IRA, then neither a QDRO nor a QILDRO will be used to divide that property. An IRA, if considered marital property, will be divided in a divorce by the settlement agreement or by the court’s decision. A court’s decision on whether the IRA is martial property is based on the evidence that the parties present and the burden of proving that the property is not marital is on the party seeking that recognition. See In re Marriage of Jelinek, 244 Ill.App.3d 496, 504 (1993). If the transfer of an IRA occurs within one year of a divorce and is related to the divorce, then it is considered to be “incident to divorce” and it is not taxable to the spouse. See IRC §1041(c). IRA’s are often transferred by letters of directions which come from the financial institutions which hold the account. Dividing an IRA is usually a quicker process than a dividing a retirement account with a QDRO or QILDRO because of the financial institution’s role subject to the letter of direction.