During marriage, many Illinois couples spend at least some time planning for their golden years. For many, that involves contributing to a 401(k) or earning a pension to fund those plans. If the marriage ends in divorce, the parties will more than likely each have a claim to at least part of those funds. If the account holder is not of legal retirement age, dividing retirement funds could create a taxable event. Right?
Under normal circumstances, that would be true, but the law recognizes that these accounts can be considered marital property in a divorce, and one party will give part of the funds to the other. In order to avoid the tax ramifications of an early withdrawal, the party who owns the account will need a qualified domestic relations order. A QDRO is an order that recognizes the withdrawal as incident to the divorce, which means that no tax penalties will be assessed.
However, a QDRO only works if it is properly drafted and executed. It must contain certain information and be signed by a judge. It can be part of the divorce settlement or decree, or it can be its own document. Before simply putting together a QDRO, it would be a good idea to check with the plan administrator to see whether any particular information is required for it to be valid. Some plans have their own forms, but the account holder will still want to make sure that it covers everything needed. For instance, the order must specify a percentage or amount of the funds that will go to the other party, who becomes an alternate payee.
For some Illinois residents, the amount that will be transferred to the other party is significant. For this reason alone, getting the QDRO right is essential in order to avoid incurring any tax penalties when dividing retirementaccounts. Working with a divorce attorney experienced in preparing these orders would be a wise move under the circumstances.