QDRO's and Divorce in Illinois
Retirement plans are considered marital property, meaning they are divided in divorce much like other types of property. Under Illinois law, when a married couple divorces, their shared property – the marital property – is to be divided equitably. If the parties cannot come to an agreement, the judge will decide what's fair.
Retirement plans, such as 401(k)s, IRAs and pensions, are considered marital property regardless of whose name is on the account. They are subject to division just like bank accounts, real estate and other investments. The difference is that retirement plans can be more complicated to split and may require a special document called a Qualified Domestic Relations Order, or QDRO (pronounced “quadro”).
Keep in mind that if the retirement plan predates the marriage, then it's probably not entirely marital property. If the spouse with the retirement plan started making contributions in 1995 and then married in 2000, the first five years are likely separate property and only the remainder would be divided between the spouses in divorce.
There are two main ways to divide retirement plans in divorce: (1) splitting the retirement plan in two (using a QDRO), or (2) offsetting the value with other property (the spouse without the retirement plan takes a greater share of other property in place of part of their spouse's retirement account).
Dividing the Plan
Dividing retirement plans requires special care because their value isn't always clear. With a 401(k), the value can often be seen on monthly statements, but it can be difficult to put a current value on a pension. Pensions generally pay out a set amount per month starting at a certain age. If Spouse A has $80,000 in a 401(k), Spouse B may be entitled to $40,000. But if Spouse A has a pension that entitles him to $700 per month at age 65, and that's still 15 years away, it can take an expert to determine the current value and Spouse B's share.
Accountants and other experts are often needed to value retirement plans. Then, the QDRO orders the retirement plan administrator to basically create two accounts, one in each spouse's name.
Ideally, a QDRO should be drafted by an attorney and signed by the judge at the time your divorce is finalized. Spouses can disagree on the value of an account, how it's to be divided, or when. It's generally recommended that you settle this issue at the same time as other property division issues in order to save time and attorneys' fees.
Beware of form QDROs. We often caution people against a one-size-fits-all approach when it comes to a legal document. While a 50/50 split may seem straightforward, it's worth consulting with someone about all your options. This is especially true if your spouse has an attorney. Your spouse's attorney may answer your basic questions, but it's their job to look out for your spouse's best interest, which likely is different from yours.
The other option is called an offset. This means that the spouse who could take part of a retirement plan under a QDRO takes other property of equal value instead.
For example, if Spouse A has $250,000 in a retirement plan that is considered marital property, Spouse B has no retirement plan, and they together own a house valued at $250,000, they could use the offset method. Spouse B could forgo his half of Spouse A's retirement plan ($125,000), and instead take Spouse A's half of the house (also $125,000). In other words, Spouse A gets the retirement plan and Spouse B gets the house. Obviously it doesn't usually work out this easily, but you get the idea. As we explained above, if the retirement plan is a pension, a present-day valuation (how much the plan is worth now as opposed to the date of retirement) is more difficult.
It's important to have personalized advice and guidance when splitting a retirement plan because there are a lot of things to consider. For example, let's say your spouse has $50,000 in a 401(k) and it's agreed that half will be rolled over into an IRA in your name. While you should be able to avoid penalties and fees in a rollover, keep in mind that it's not the same as cash. If you had $25,000 in cash, you could take it out if you needed it; with the $25,000 in an IRA, you may have to pay penalties and fees to access the money if you needed it right away.
If you need a referral to a divorce attorney with specific experience in dividing retirement plans and drafting QDROs, contact us. Sometimes, people wait until after a divorce to get a QDRO, and we can help with that, too although we usually suggest that it be handled during the divorce if possible.
We will listen to your unique situation and recommend the best attorney for you. We know divorce attorneys throughout Illinois, and we only refer people to attorneys we'd recommend to our own friends and family. Your call or e-mail is completely free and confidential.