Divorce is a complex legal process with many potential financial pitfalls. This may be especially true if there is a retirement account, such as a 401K to divide. Laws and rules of the plan must be adhered to carefully or the parties stand to lose far more than just their future financial security. There is also the risk of severe penalties and extreme financial loss as early as the finalization of one’s divorce. Thankfully, it is possible to mitigate (and potentially even avoid) such issues. Learn more in the following sections, including how the assistance of a seasoned, competent divorce attorney can help improve the outcome in your Illinois divorce case.
The Risks of Dividing a 401K in Divorce
Like all retirement plans, 401K pension plans have certain rules regarding early withdrawals (before age 591/2). Fail to follow them and you could face early withdrawal penalties from the plan administrator as well as taxation from the Internal Revenue System (IRS). Sadly, you can still lose money when you follow the rules of the plan. For example, you could lose money from losses or gains in the 401K if the divorce decree uses a percentage to divide the account, rather than an exact dollar amount.
Tips for Dividing a 401K in Your Illinois Divorce
While there are many pitfalls that one may experience while dividing a 401K during a divorce, there are a few strategies that can help you mitigate the risks. These include: