Dividing Retirement Savings Accounts and Pensions in Divorce Cases

In divorce cases, the division of retirement accounts and pensions is often an issue.  Properly handling 401(k), pension, thrift saving plans, annuities, IRAs, and other retirement plans is of great importance in Iowa and Illinois.

 How retirement account and pensions are distributed in Iowa and Illinois divorce cases

Generally speaking, in both Illinois and Iowa, retirement savings such as a pension, annuity, 401(k),  SEP plan, IRA, TSP, or other retirement account is first divided into the marital and (if applicable) non-marital portions.

For example, consider a scenario where the husband worked at John Deere for 20 years total, contributing to his 401(k) for all 20 years, and was married to the wife for 10 of those years.  Then, the husband and wife get divorced. Under such a scenario, generally speaking, Iowa and Illinois law would say that the wife is presumptive entitled to half of the 401(k) account that was accrued during the 10 years of marriage.  Note that does not mean 1/2 of the 401(k) account, but some number closer to 1/4 of the 401(k) account.  I say “closer” because the actual calculation is much more complex, taking into account the amount that was contributed each month of marriage, how interest accrued on the marital and non-marital portions, etc.

The situation is further complicated by agreements that can be reached or court Orders that can reallocate retirement account divisions from that default rule of evenly dividing the marital portion.

As an example of an agreement that might be reached, consider that same example from above, but add in the wife having her own retirement account from ALCOA, where she worked for 10 years, all of which were during the marriage.  If the wife’s retirement account with ALCOA (which is entirely marital in this example) was of identical value to the marital portion of the husband’s John Deere account, it may make sense for the parties to agree that they each just keep their own accounts, so as to avoid the hassle of shuffling money around when the net result would be the same if they just kept their own accounts.

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To give an example of the court reallocating accounts, imagine a further modification of the above scenario where there is a martial home that is owned outright, which one spouse wants and the other does not want, and for which they have both equally contributed yet neither has the ability to pay the other the portion of house equity that the court finds would be fair for the spouse who is leaving to be paid.  The court could use retirement account(s) to offset some or all of the equity in the home, so as to allow one spouse to have the home and the other to be properly compensated for their equity interest.

It would be possible to give dozens more examples, but the idea should be clear. Retirement accounts can be distributed in a great many ways during a divorce by the Iowa District Court or the Illinois Circuit Court.

The importance of handing retirement account distribution properly

Retirement accounts can be some of the most valuable property that a person owns, and failing to properly handle such accounts during a divorce case can lead to serious financial problems later in life.

Aside from not properly addressing the accounts in the divorce settlement agreement or decree, another common problem is not properly distributing those accounts.  It is generally necessary to also enter a Qualified Domestic Relations Order (QDRO) or Court Order Acceptable for Processing (COAP) and properly serve it upon the retirement plan administrator in order to distribute the retirement account portion(s) to the receiving spouse.  The QDRO or COAP itself must be perfectly drafted, otherwise it will be rejected by the retirement account plan administrator.

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I have represented multiple clients over the years who had another attorney back when they were divorced (often decades before) and were awarded retirement accounts in the divorce decree, yet their previous attorney did not ensure a QDRO and/or COAP was properly entered.  The result was that the client did not end up properly receiving the retirement money that they had been planning on receiving for years, often with great hardship resulting.  Sometimes that problem can be fixed years later.  Sadly, in other cases (such as where the other spouse has improperly withdrawn and then spent the retirement money such that it is gone and cannot be recovered), there may be no solution for that spouse.  For all of those reasons, it is best to properly handle retirement accounts in a divorce case.

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