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Chicago divorce

Protecting Your Retirement Savings During Divorce

When undergoing a divorce in Chicago, many individuals express concern about the impact on their retirement savings. With the average cost of a divorce in the city ranging from $13,000 to $20,000, couples understandably worry about maintaining financial stability after the split. However, there are steps specifically tailored to Chicago that you can take to safeguard your retirement savings during this process.

Understand Your State’s Laws

The first step in protecting your retirement savings during a divorce is to understand the laws in your state. Each state has its own regulations regarding the division of assets, including retirement savings. In Chicago, assets, including retirement savings, are distributed based on the principle of equitable distribution. This ensures a fair division determined by the court, although it does not necessarily mean an equal 50/50 split. Familiarizing yourself with these laws and how they may impact your retirement savings is important.

Types of Retirement Assets

During a divorce, various types of retirement accounts and assets are typically considered for division. These can include:

401(k) Plans: These employer-sponsored retirement plans are common assets in divorce proceedings. They can include both pre-tax and post-tax contributions.

Individual Retirement Accounts (IRAs): Traditional IRAs and Roth IRAs are personal retirement accounts that can be subject to division during divorce.

Pension Plans: Pensions from an employer, including defined benefit plans, are often considered marital assets that may be divided.

403(b) Plans: These are similar to 401(k) plans but are typically offered by nonprofit organizations and certain public sector employers.

Military Retirement Benefits: If one or both spouses are active or retired military personnel, their military retirement benefits can be included in the divorce settlement.

Deferred Compensation Plans: Some executives or highly compensated employees may have non-qualified deferred compensation plans that are subject to division.

Stock Options and Stock Grants: Stock options, restricted stock units (RSUs), and other forms of equity compensation can be considered in the division of assets.

Employee Stock Ownership Plans (ESOPs): If a spouse holds shares in an ESOP, these can be divided as part of the divorce settlement.

Annuities: Annuities, whether purchased individually or as part of an employer’s retirement plan, may also be subject to division.

Social Security Benefits: While Social Security benefits themselves are not divisible in a divorce, the duration of the marriage may affect spousal and survivor benefits.

Cash Value of Life Insurance: If a life insurance policy has a cash value component, it might be considered a marital asset and subject to division.

It’s important to note the specific rules and procedures for dividing these retirement assets. Consulting with a qualified family law attorney or financial advisor can help you navigate the complexities of dividing retirement accounts during a divorce and ensure that the process is fair and legally sound.

Keep Track of Your Retirement Savings

Keeping track of your retirement savings is important during a divorce. This includes not only the contributions made before and during the marriage but also any gains or losses incurred on those contributions. To establish a clear picture of your financial situation, it is crucial to maintain thorough documentation, such as detailed account statements, which accurately reflect the amount contributed and the corresponding timelines. This information will be necessary during the divorce proceedings to ensure that your retirement savings are accurately divided.

Retirement Savings Earned Prior to Marriage

Generally, assets acquired before the marriage are considered non-marital property, while assets obtained during the marriage are often categorized as marital property subject to division. However, when it comes to retirement accounts, things can get more complex because they may contain a mix of both marital and non-marital funds.

A retirement plan may be considered non-marital property if it existed before the marriage. In such cases, the portion of the retirement account directly attributed to the non-marital funds would likely be treated as separate property and might not be subject to division during divorce proceedings. However, this requires meticulous record-keeping and documentation to prove the separate origin of these funds.

When a retirement account contains both marital and non-marital property, options for dividing it include a process known as “separate interest” or “shared interest” division. In a separate interest division, the non-marital portion is allocated to the spouse who owns it, while the marital portion is subject to equitable division between the spouses. The exact method of division can vary. To ensure a fair and legal division, it is beneficial to consult with legal professionals and/or a Certified Divorce Financial AnalystTM experienced in divorce and property division, as they can help navigate the complexities of separating marital and non-marital assets within a retirement account and protect each spouse’s rights and interests.

Negotiate for Your Retirement Savings

During the divorce proceedings, it’s important to negotiate for your retirement savings. This involves engaging in a thorough discussion on how you envision the division of your retirement savings and working towards a mutually agreeable resolution. It is also advisable to take into account the potential tax implications associated with dividing retirement savings, as certain accounts may attract penalties for early withdrawal. You want to have a clear and detailed discussion with your ex-partner and come to a fair resolution.

Consult with a Certified Divorce Financial AnalystTM

We believe it is beneficial to consult with a qualified and experienced financial advisor who specializes in divorce proceedings in Chicago. A Certified Divorce Financial AnalystTM well-versed in the local regulations can provide you with comprehensive insights into the implications of dividing your retirement savings. They can offer valuable advice on how to protect your assets effectively. Additionally, a skilled financial advisor can assist you in developing a post-divorce financial plan that takes into careful consideration any potential alterations to your income or expenses, ensuring that you are well-prepared for the financial changes that may arise as a result of the divorce.

Work with us

If you have more questions about divorce, our team is here to help you every step of the way.  At Purposeful Wealth Advisors, we work closely with divorce attorneys, accountants, and other dedicated professionals to arrive at comprehensive solutions for our clients. 

Contact us today to know more!

Any opinions are those the author, and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. Raymond James and its advisors do not offer tax or legal advice.