Most people have two big assets: their home and their retirement savings. The retirement savings are usually kept in a tax-deferred account like a 401(k).

401(k)s are a great tool for savers. 401(k)s are automatically funded from employees paychecks. Employers can also match 401(k) savings. 401(k) funds are not taxed until they funds are withdrawn (which happens decades later when the employee is retired and in a lower tax bracket.

While not often considered, 401(k)s cannot be touched by creditors in a lawsuit.

“A debtor’s interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment” 735 ILCS 5/12-1006 (emphasis mine)

Even if a 401(k) owner files for bankruptcy, the 401(k) owner still gets to keep all the money in their “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C. §522(b)(4)(d)(12)

Are 401(k)s similarly protected in an Illinois divorce?

401(k)s are not protected from divorce to the extent that their contents can be considered marital property.

Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions.” 750 ILCS 5/503(d)

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)

Whether a 401(k) is protected from division in an Illinois divorce depends on whether any of the 401(k)s assets were acquired during the marriage.

“For purposes of distribution of property pursuant to this Section, all pension benefits (including pension benefits under the Illinois Pension Code, defined benefit plans, defined contribution plans and accounts, individual retirement accounts, and non-qualified plans) acquired by or participated in by either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of the marriage are presumed to be marital property.” 750 ILCS 5/503(b)(2)

If even one payment was made to fund a 401(k) during a marriage, the 401(k) will be subject to division. The 401(k) will NOT be deemed to be entirely marital property, however.

“For purposes of this Act, “marital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage, except the following, which is known as “non-marital property

property acquired before the marriage, except as it relates to retirement plans that may have both marital and non-marital characteristics” 750 ILCS 5/503(a)(6)

Because of this specific itemization of the marital and non-marital proportions of a 401(k), the “just proportions” in which a 401(k) are divided are virtually always 50/50.

The marital portion of the 401(k) is then identified and divided via a qualified domestic relations order.

“The term “qualified domestic relations order” means a domestic relations order—

which creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan” 26 U.S. Code § 414(p)(1)(a), ERISA § 206(d)(3)(B)(i)

The marital settlement agreement typically specifies that the spouse who does not own the 401(k) shall be awarded 50% of the 401(k)’s marital portion.

The QDRO plan administrator reads these instructions, inputs the dates of the marriage and divorce and then uses actuarial software to determine and divide the 401(k)’s marital portion down to the penny.

That marital portion of the 401(k) is then turned into a separate 401(k) in the name of the divorced spouse it was awarded to. By preserving the money awarded to the spouse as a 401(k) the spouse avoids the penalties and taxes associated with early withdrawal from a 401(k).

While a 401(k) is not protected in an Illinois divorce any diminishment of a 401(k) due to divorce can be made up in the future by the diligent saver. The law allows for additional contributions to a 401(k) when you are over 50.

“In the case of an individual who has attained the age of 50 before the close of the taxable year, the deductible amount for such taxable year shall be increased by the applicable amount.” 26 U.S. Code § 219(b)(5)(B)(i)

“Catch-up contributions for individuals age 50 or over…A plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount greater than the lesser of…the applicable dollar amount

…In the case of an applicable employer plan described in section 401(k)(11) or 408(p), the applicable dollar amount is $2,500” 26 U.S. Code § 414(v)

That $ 2500 catch-up amount gets “adjust[ed] annually…for increases in the cost-of-living” 26 U.S. Code § 414(v)(2)(C). In 2023, the additional catch-up amount is $ 7500.

401(k)s are at tool for saving for your retirement. When you were married you were saving for both your retirement and your spouse’s retirement. Now that you are getting a divorce, the 401(k) will be divided in some proportion and you will reconsider your retirement needs. To learn more about how to effectuate the best division of your retirement assets, contact my Chicago, Illinois family law firm to schedule a free consultation with an experienced Illinois divorce attorney.