Considerations when Dividing Retirement Assets in a DivorceMany different vehicles exist for those considering saving for retirement — individually or
offered through employment, including, but not limited to, individual retirement accounts, profit
sharing plans, 401(k) plans, 403(b) plans, employee stock ownership plans, defined benefit
pension plans, etc. Typically, when a person begins saving for retirement, the thought of the
possibility of a divorce at some point in the distant future is not at the forefront of most peoples’
minds. Likewise, one’s retirement plan is not the most pressing concern when he or she is
planning a wedding and getting married.

As retirement plans are often the largest assets people own other than their home, parties must
proceed with caution when negotiating their interests with respect to their retirement plans and

A basic tenet in Illinois divorce law is that all property acquired during a marriage is presumed to
be marital; therefore, it is well-accepted that increases in vested pension benefits and
contributions to a retirement plan during a marriage, are typically considered marital property. If
a party’s interest in the retirement plan or pension benefits did not accrue until after the marriage,
the analysis is simple — the vested balance and/or benefits will all be presumed marital and
subject to division upon divorce or legal separation.

Alternatively, if the retirement plan was started prior to the marriage, or if the party’s interest in
the pension benefit began accruing prior to the marriage, the analysis becomes a bit more
complicated. It will be necessary for the parties to know the percentage of the value/benefits
which is marital and the percentage which is non-marital so that parties can knowingly negotiate
a property settlement, whether it be a division of the retirement plan or by reaching an agreement
to off-set the a portion of the retirement plan with other property.

Briefly, retirement plans are separated into qualified and non-qualified plans for income tax
purposes. Qualified plans are funded with pre-tax money, and participants receive a tax
deduction upfront; however, taxes will have to be paid on all distributions. Qualified plans
include defined contribution plans, such as 401(k) plans, 403(b) plans, thrift savings plans, profit
sharing plans, and simplified employee pensions; and defined pension benefit plans, such as
pensions received through a union or through government employment. Non-qualified plans are
funded with after-tax dollars, and include but are not limited to individual retirement accounts,
such as mutual funds, money market accounts, and annuities.

For defined contribution plans and non-qualified retirement plans, it is important for parties to
retain statements of account balances as of the date of the marriage, as this will be the starting
point of the analysis. Thereafter, new contributions will be considered marital. However, the
increase or decrease in value to the plan by way of investment transactions or other activity
within the plan should be allocated appropriately to the marital and non-marital portions of the

Determining the marital portion of defined pension benefits is most commonly done by dividing
the time of plan service while married by the time of all plan service to date. For example, if the parties are married for 10 years and the pension has been accruing for 15 years, the formula
would be 10 divided by 15 or more commonly, 120 months divided by 180 months. This
fraction would then be multiplied by the present value of the pension.

In addition to determining the marital portion of a retirement plan, the parties will need to
understand how the division will actually be implemented. For defined benefit pension plans
and defined contribution plans, the division will most likely be pursuant to a Qualified Domestic
Relations Order, which will most often be approved by a plan administrator prior to the divorce
and will ensure that the parties avoid the penalties and taxes associated with early withdrawal.

However, if the division of property is not enough to adequately sustain a party prior to
retirement, and that party is considering taking a withdrawal prior to him or her reaching the
minimum retirement age, the penalties and taxes should be considered at the time of the divorce.

On the other hand, non-qualified plans are, most commonly, divided either through rollovers or
by way of a distribution, which comes with penalties and tax implications that should be
considered when negotiating a settlement. The parties will need to address whether both parties
will be responsible for the penalties and taxes prior to the divorce being finalized.

Many minute details go into negotiating a marital settlement agreement and dividing property in
a divorce. And although a complex, and often daunting, aspect of the agreement, parties should
be fully aware of their interests, both marital and non-marital, and the benefits and liabilities
associated with those interests, in any retirement plan before agreeing to a settlement.


by Brandy Wisher