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Dividing 401(k)s, IRAs and Annuities in Divorce


If you want to learn more about dividing 401(k)s, IRAs, and Annuities during a divorce in Chicago, Illinois, contact Family Law Attorney Angela Larimer at 773-370-0600.


When dividing assets like 401(k)s, annuities, and IRAs during a divorce, it is important to understand that transfers made between spouses as an incident to divorce are tax-free. To learn more about dividing these types of assets in a divorce and leverage assets as negotiating and settlement strategies, divorcing couples in Chicago can contact Family Law attorney Angela Larimer at 773-370-0600.


Dividing 401(K)s

Separate from a divorce decree, a court order known as a Qualified Domestic Relation Order (QDRO) is a key requirement when it comes to dividing 401(k)s. A spouse is entitled to all or a portion of a 401(k). The QDRO confirms each spouse's right to his or her portion of the money.


Each plan comes with unique administrative guidelines and provisions for benefits. However, many divorce lawyers advise divorcing couples to reach an amicable agreement when dealing with 401(k)s. The following are options available to divorcing spouses:

  • One spouse retains the 401(k) in return for another equally valued asset. While this is the least difficult approach, it involves difficult calculations and in-depth negotiations to resolve growth potential.

  • Splitting the 401(k). Many spouses choose to split the 401(k) into two accounts. This enables each account holder to continue to contribute to and manage his or her own funds. However, the recipient spouse cannot make additional contributions to his or her account directly.

  • Cashing out a portion of the 401(k) to pay the other spouse. This option requires legal approval, but with the QDRO, the spouse who owns the account would avoid early withdrawal penalties on the distribution.

  • The 401(k) rollovers. Some spouses choose to roll the other spouse's portion of their 401(k) into an IRA. With this option, both the account holder and the recipient avoid tax liabilities until the funds are withdrawn, but they may be required to pay a one-time rollover fee.


Dividing IRA Assets

The best way to split an IRA is to perform a trustee-to-trustee transfer, where assets are moved from the IRA of one spouse to the account of the other spouse. This approach is advantageous because it allows the IRA owner to avoid taxes and the 10% early distribution penalties.


Dividing Annuities

Annuities are some of the assets that many divorcing spouses tend to forget during a divorce. The following may be options for splitting annuities:


Withdrawal

This option involves withdrawing either a part or all of an annuity and then distributing it to both spouses directly.


Transferal

This approach involves having awarded amounts moved directly to the recipients via an IRA account.


Starting a New Contract

This option involves withdrawing from an already existing contract and starting two separate contracts for both spouses.


Transferring Ownership

This option doesn’t divide an annuity between two spouses. Instead, it awards all rights and administration of an existing annuity to one spouse for a new annuity contract to come into effect.




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