Rollover IRAs and Divorce In Illinois
401(k)s and other retirement accounts get divided in a divorce based on the contributions made to those accounts during the marriage. When those accounts get consolidated into a rollover IRA, the mathematics required to accurately divide the retirement account becomes much more difficult. How do you divide a rollover IRA in an Illinois divorce?
What Is A Rollover IRA?
Having a multitude of 401(k) accounts makes retirement planning difficult. If you wanted to change your investments strategy, you’d have to change every single 401(k) account.
Normally, cashing out or consolidating a 401(k) plan will trigger a taxable event or a penalty. Transferring or consolidating a 401(k) account into a rollover IRA will not create a taxable event or a penalty.
Rollovers do not trigger a taxable event if “the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.” 26 U.S. Code § 408(d)(3)(A)(i)
A rollover IRA allows a 401(k)’s funds to maintain their tax-deferred status.
What Happens To A Rollover IRA In An Illinois Divorce
“When determining the distribution of a marital estate, the trial court must first determine what constitutes marital property and what constitutes nonmarital property.” In re Marriage of Foster, 17 NE 3d 781 – Ill: Appellate Court, 1st Dist., 6th Div. 2014
“”[M]arital property” means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage.”750 ILCS 5/503(a)
Retirement benefits acquired during the marriage are presumed to be marital.
“[A]ll 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 a benefit was earned before the marriage, the acquirement of that benefit must be proven.
“A spouse may overcome the presumption that these pension benefits are marital property by showing through clear and convincing evidence that the pension benefits were acquired by a method listed in subsection (a) of this Section.” 750 ILCS 5/503(b)(2)
Property acquired before marriage is non-marital with a special exception for retirement accounts that have had contribution both before and after the date of marriage.
Property is non-marital if the “property [is] acquired before the marriage, except as it relates to retirement plans that have marital and nonmarital characteristics.” 750 ILCS 5/503(a)(6)
Retirement accounts can have a marital and non-marital portion whereas most other accounts must be one or the other in their entirety.
Property identified as non-marital CANNOT be divided by an Illinois divorce court. “[T]he court shall assign each spouse’s non-marital property to that spouse.” 750 ILCS 5/503(d)
Calculating the non-marital portion of a retirement account is easy if you can enter a Qualified Domestic Relations Order for the original account. The retirement plan administrator can determine to the penny what sums were deposited before the marriage and how those non-marital assets grew over time.
The problem is that a rollover IRA’s plan administrator will not have all of the data from the previous 401(k) plan of when deposits were made into the plan. Therefore, the plan administrator cannot calculate the non-marital portion of a rollover IRA.
You have to calculate the non-marital portion of a rollover IRA yourself!
How Do You Calculate The Non-Marital Portion Of A Rollover IRA In An Illinois Divorce?
“The party claiming that the property is nonmarital has the burden of rebutting the presumption by clear and convincing evidence, and any doubts as to the classification of property will be resolved in favor of finding that the property is marital property.” In re Marriage of Stuhr, 56 NE 3d 525 – Ill: Appellate Court, 1st Dist., 5th Div. 2016
The process of identifying the non-marital portion of a possibly marital asset is called “tracing.”
“Tracing of funds is a procedure which allows the court to find that property which would otherwise fall within the definition of marital property is actually nonmarital property under one of the statutory exceptions.” In re Marriage of Jelinek, 244 Ill.App.3d 496, 504, 184 Ill. Dec. 692, 613 N.E.2d 1284 (1993)
“Tracing requires that the source of the funds be identified.'” In re Marriage of Demar, 385 Ill.App.3d 837, 851, 325 Ill.Dec. 74, 897 N.E.2d 322 (2008)
The purpose of tracing is to carve out the non-marital portion of a marital account so that the party can be reimbursed for that non-marital contribution.
“When one estate of property makes a contribution to another estate of property, the contributing estate shall be reimbursed from the estate receiving the contribution notwithstanding any transmutation. No such reimbursement shall be made with respect to a contribution that is not traceable by clear and convincing evidence or that was a gift.” 750 ILCS 5/503(c)(2)
Tracing is especially difficult for investments because investments grow. The non-marital potion of a retirement account grows and that growth will also be deemed non-marital.
“[T]he increase in value of non-marital property, irrespective of whether the increase results from a contribution of marital property, non-marital property, the personal effort of a spouse, or otherwise, subject to the right of reimbursement” 750 ILCS 5/503(a)(7)
Tracing the non-marital portion of a rollover IRA takes clear and convincing evidence with corroborating documents. This almost always means statements from the previous 401(k) that funded the rollover IRA.
“[T]he bare assertion of a nonmarital source of a particular sum of money, without supporting documentary evidence such as account records, deposit slips, canceled checks, etc., cannot be deemed clear and convincing.” In re Marriage of Davis, 215 Ill.App.3d 763, 770, 159 Ill.Dec. 375, 576 N.E.2d 44 (1991))
An expert’s testimony as to how they calculated the non-marital portion of the rollover IRA will usually be necessary in order for a court to make sense of the tracing.
If you don’t have statements from the previous 401(k) testimony about how and when you contributed to the 401(k) may still be enough to identify a non-marital portion.
“[A] party’s testimony may be sufficient to trace whether marital funds were contributed to nonmarital property.” In re Marriage of Stuhr, 56 NE 3d 525 – Ill: Appellate Court, 1st Dist., 5th Div. 2016
That testimony better be crystal clear and make perfect sense.
“Even uncontradicted testimony, if inherently unreasonable or improbable, need not, be believed.” In re Marriage of Pittman, 212 Ill.App.3d 99, 103, 155 Ill.Dec. 667, 569 N.E.2d 1278 (1991)
If you have a rollover IRA and are getting a divorce in Illinois, you need to gather your previous 401(k)’s records and contact an experienced Illinois divorce lawyer.