Understanding Retirement Funds in Illinois Divorce: A Guide to Planning and Protection

Divorce introduces unique financial challenges, particularly when it involves retirement assets. Illinois law governs the division of these assets and the modification of spousal maintenance payments, especially when one or both spouses are retired or nearing retirement. For clients in or approaching this stage, understanding how retirement assets like 401(k)s, pensions, and stock options are handled in Illinois divorce law is essential.

The Basics of Illinois Divorce Law on Retirement Assets

Divorce law in Illinois considers two primary financial factors: marital assets and income. When one spouse retires, both their income and potential support obligations may shift significantly, impacting the division of marital assets and any ongoing support payments. Although Illinois law doesn’t directly address retirement in divorce statutes, courts rely on established legal principles to guide decisions.

Here are some key considerations:

• Asset Division: In Illinois, marital assets, including retirement funds, are divided equitably, which means fairly but not necessarily equally. The court considers factors such as each spouse's contributions, financial needs, and overall financial situation when determining the division of assets.
• Income Assessment for Maintenance: If one spouse earns more, they may be required to pay spousal maintenance (or alimony) to the lower-earning spouse. Retirement significantly alters income, influencing whether spousal maintenance is awarded or modified. To learn more about how retirement impacts spousal maintenance read our piece Retirement and Spousal Maintenance in Illinois Divorce Proceedings.

Dividing Retirement Assets: Marital vs. Non-Marital Property

Retirement accounts can be marital, non-marital, or a combination of both:

• Marital Property: Retirement assets accumulated during the marriage are typically marital property, which means they’re subject to division.
• Non-Marital Property: Assets earned before the marriage are generally considered non-marital. If a retirement fund was partially accumulated before marriage, only the portion gained during the marriage is marital property.

For retirement benefits, the date of marriage is crucial, as it defines which portion of these assets is marital. When dividing retirement funds, Illinois courts often utilize a Qualified Domestic Relations Order (QDRO), a legal tool that specifies each spouse’s share in retirement plans like 401(k)s and pensions.

Types of Retirement Accounts in Illinois Divorce

Retirement assets often come in several forms, each requiring specific handling in divorce:

• 401(k)s, IRAs, and Pension Plans: Generally, these are considered marital property if contributions were made during the marriage. With a QDRO, these accounts can be split without incurring tax penalties.
• Stock Options: Like retirement accounts, stock options earned during the marriage are marital property, whether they are vested or non-vested.
• Social Security: Social Security benefits are protected under federal law, meaning they cannot be divided by court order. However, an ex-spouse may be eligible for benefits based on the higher-earning spouse’s record if the marriage lasted over 10 years.

Modifying Maintenance with Retirement

If a spouse retires or plans to retire, this may qualify as a “substantial change in circumstances,” allowing either party to seek a maintenance adjustment. Courts consider factors like age, health, and financial impact on both parties before approving modifications.

Retiring Spouse:

• May request reduced spousal maintenance if retirement reduces their income.

Receiving Spouse:

• A maintenance recipient may request an increase if the paying spouse’s retirement significantly affects their income. The outcome depends on factors like the former spouse’s ability to support themselves post-divorce.

Vested and Non-Vested Retirement Benefits in Divorce

Retirement benefits, such as pensions and stock options, often have different statuses:

• Non-Vested: These assets have not yet been earned or made accessible; they are anticipated benefits. Even if these are earned during marriage, they cannot be divided until they vest.
• Vested: Benefits or options are vested when they become the spouse’s asset, available regardless of their employment status.
• Matured: Matured benefits are immediately available for withdrawal, which can influence both asset division and maintenance.

Stock Options in Divorce: Special Considerations

Stock options, often used to retain employees, require unique handling in divorce:

• Vested Options: If stock options vest during the marriage, they are presumed marital property.
• Non-Vested Options: These may be considered marital if earned during the marriage, but their division is postponed until they vest.

If a stock option is both non-vested and tied to future employment, courts may impose a constructive trust to hold the asset until it vests. A constructive trust ensures that the non-owning spouse’s share is preserved even if the asset is not immediately divisible.

Accessing Retirement Funds During Divorce

Sometimes, divorcing spouses need cash for immediate expenses, which may lead to tapping into retirement funds:

• Withdrawing Funds: Divorce does not restrict access to retirement accounts unless a court order specifically freezes them. However, withdrawing funds can incur tax penalties if done before age 59½. Courts may view penalties as dissipation (wasting) of marital assets, potentially reducing the withdrawing spouse’s portion.
• Borrowing Against Accounts: For accounts like 401(k)s, loans are possible without penalties if they stay within IRS limits. However, borrowed funds are typically assigned to the borrowing spouse in the final property allocation.

Illinois Law on Court-Ordered Retirement Fund Access

Illinois law allows courts to impose temporary orders on marital assets, but retirement accounts are protected against such access except for child support or spousal maintenance arrears. Courts cannot order withdrawals from retirement accounts to cover attorney fees or other expenses during the divorce process. Final divisions are typically handled post-divorce via QDROs or similar methods.

Social Security and Maintenance Calculations

Federal law prevents Social Security benefits from being divided as a marital asset. However, Social Security can impact spousal maintenance in Illinois:

• Recipient’s Benefits: If a maintenance recipient begins receiving Social Security, their maintenance could be reduced if they now have additional income.
• Payor’s Benefits: If a maintenance-paying spouse collects Social Security, it may impact their obligation, but only in terms of available income rather than the division of benefits.

Protecting Your Rights During Divorce

Retirement and divorce intersect in complex ways. To ensure equitable treatment and secure financial stability, clients are encouraged to work with experienced Illinois divorce attorneys who can:

• Navigate Asset Division: Using QDROs, lawyers can facilitate a clear and tax-efficient division of retirement accounts.
• Secure Spousal Maintenance Adjustments: Attorneys help clients request adjustments to maintenance based on life changes, including retirement.
• Maximize Social Security Options: For long marriages, clients may be eligible for increased Social Security benefits based on their former spouse’s earnings record.

Whether you’re retiring soon or already retired, divorce can significantly impact your financial future. Protecting retirement assets and securing fair maintenance arrangements are essential steps for ensuring stability. Contact O. Long Law, LLC for a consultation to discuss your rights and learn more about managing retirement and divorce effectively.