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What to do about pensions and 401(k)s in divorce

For Illinois couples who are getting divorced, dividing up a pension plan or 401(k) must be done carefully in order to avoid expensive mistakes. First, it's necessary to have a document called a qualified domestic relations order for each account that must be divided.

The QDRO has to set the parameters for dividing the account. Those parameters must be the same as in the divorce agreement, and the QDRO has to be accepted by the plan administrator. The terms of division should be set out in percentages instead of dollar amounts in case there is fluctuation in the value of the account. Furthermore, the QDRO has to state how the distribution will be made. Divorce is a qualifying event that allows an early withdrawal before the age of 59 1/2 without a penalty, but if the distribution is not rolled into an IRA, the recipient will be taxed on the funds.

A spouse who is listed as a beneficiary on one of these accounts should not be removed before the divorce is final. If the owner should pass away, the spouse might not be able to access the funds. Also, people should be aware that funds in a 401(k) are exempt from creditors in a bankruptcy filing while those in an IRA are not.

There may be other complications around property division in a divorce case. In some instances, instead of going to the expense and trouble of creating a QDRO, one ex could simply take another asset that is worth about the same as the retirement account. This might also be a solution with other assets if splitting them will be costly. An attorney could help walk a divorcing spouse through this process.

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Schlueter Ecklund & Davitt
4023 Charles Street
Rockford, IL 61108

Toll Free: 800-207-5133
Phone: 815-516-8264
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