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Splitting Retirement Accounts and Pensions: Why QDROs Matter

By Nottage and Ward on June 21, 2025

Dividing property during divorce is rarely simple, but when it comes to retirement accounts and pensions, mistakes can lead to steep taxes, delayed access, or permanent financial loss.

If you’re getting divorced in Illinois and your marital estate includes a pension, 401(k), or other qualified retirement account, understanding how a qualified domestic relations order (QDRO) works is essential.

At Nottage and Ward, LLP, we guide professionals, business owners, and high-net-worth individuals through the financial complexities of divorce. We help clients avoid costly missteps by ensuring every account is properly valued, allocated, and transferred in accordance with retirement account divorce law.

What Is a QDRO?

A qualified domestic relations order (QDRO, pronounced “quad-row”) is a court order that allows a retirement plan administrator to divide a qualified retirement account (such as a 401(k), 403(b), or pension plan) without triggering early withdrawal penalties or unnecessary taxes.

A QDRO:

• Establishes the right of an “alternate payee” (typically a former spouse) to receive a portion of the retirement benefits
• Specifies the exact percentage or dollar amount to be transferred
• Allows for a tax-deferred transfer, meaning the receiving spouse won’t pay taxes until they withdraw the funds
• Can be used to divide pensions, 401(k) plans, and other qualified employer-sponsored accounts

Without a QDRO, the retirement plan cannot legally distribute funds to a non-employee spouse, even if the divorce judgment says they’re entitled to a share.

Why QDROs Matter in Divorce

A QDRO is not optional when dividing qualified retirement plans. While IRAs and non-qualified plans follow different rules, any division of a 401(k), 403(b), or defined benefit pension plan requires a QDRO to be enforceable under federal law.

In Illinois, a divorce judgment may state that one spouse is entitled to 50% of the marital portion of the other spouse’s retirement account, but that award cannot be executed unless a QDRO is prepared, submitted, and approved by the plan administrator.

For the plan participant, a QDRO ensures the funds are split without early withdrawal penalties. For the alternate payee, it secures a legal right to the designated funds and prevents future disputes.

When Is a QDRO Needed?

You’ll need a QDRO in any Illinois divorce involving a division of:

• 401(k) plans
• 403(b) plans
• Defined benefit pensions (traditional pension plans)
• Profit-sharing plans
• Government or military retirement plans (under separate procedures)

In pension division during divorce, a QDRO is critical to calculating how much of the pension was earned during the marriage and determining how to split the payments once the employee retires.

How Are Retirement Accounts Divided in Illinois?

Illinois follows the principle of equitable distribution, meaning retirement accounts are divided “fairly” but not necessarily 50/50.

Marital portions of retirement savings—those accumulated during the marriage—are subject to division. Pre-marital contributions typically remain with the original account holder.

In a 401(k) split in Illinois, the court will consider:

• The length of the marriage
• The contribution of each spouse
• The presence of other marital or non-marital assets
• The earning potential and financial needs of each party
• The value of the account at the time of marriage and the time of divorce

A detailed marital balance sheet, often prepared with the help of a forensic accountant, is used to calculate how much of the retirement savings is subject to division.

Timing and Tax Implications

A QDRO should be prepared and submitted immediately after the divorce judgment is entered. Delays can result in:

• Market fluctuations that affect the final division
• Death of the plan participant before benefits are transferred
• Distribution problems due to account changes, job changes, or company restructuring

Tax treatment matters, too. With a QDRO:

• Transfers to the alternate payee are not taxed at the time of transfer
• The alternate payee may roll over the funds into an IRA to preserve tax deferral
• If the alternate payee chooses to withdraw funds, regular income tax applies—but no early withdrawal penalty is charged (even if under age 59½)

Without a QDRO, however, any attempted transfer may be treated as an early distribution, which could trigger a 10% penalty in addition to income tax.

Common QDRO Mistakes to Avoid

Drafting a QDRO isn’t a do-it-yourself project. Even skilled attorneys sometimes overlook key plan details or fail to coordinate with plan administrators. Mistakes may include:

• Vague or incomplete terms that the plan administrator rejects
• Wrong percentages due to math errors or outdated valuations
• Failure to name the correct plan (especially if the employee has multiple accounts)
• Missing survivor benefits in pension QDROs, which can leave the alternate payee with nothing if the plan participant dies first
• Late submission, which can cause valuation issues or legal disputes

At Nottage and Ward, LLP, we collaborate with trusted QDRO specialists and plan administrators to draft precise, enforceable orders to protect your interests now and in the future.

What About IRAs and Non-Qualified Plans?

Although IRAs don’t require a QDRO, they still need court authorization for a penalty-free transfer. This is usually handled through a transfer incident to divorce and should be done carefully to avoid unintended tax consequences.

Stock options, executive bonuses, and other non-qualified plans often require additional legal and financial strategy. These assets can be tricky to value and divide, especially in high-net-worth divorce cases.

Our Chicago divorce attorneys are experienced in navigating complex compensation structures and ensuring no marital value is left off the table.

The Importance of Strategic Legal Counsel

Splitting retirement assets isn’t just about dividing the numbers. It’s also about the following:

• Protecting future income streams
• Preserving tax advantages
• Ensuring compliance with federal and state law
• Securing long-term financial stability for both parties

At Nottage and Ward, LLP, we approach divorce with a focus on smart financial outcomes, particularly for professionals, executives, and business owners. We understand how to identify and properly divide retirement accounts, work with valuation experts, and draft QDROs tailored to each unique case.

Speak With a High-Net-Worth Divorce Attorney in Chicago

If you’re going through a divorce and you need to divide retirement accounts, pensions, or executive compensation, it’s time to protect your financial future with skilled legal guidance.

Our Chicago property division lawyers at Nottage and Ward, LLP, have over 35 years of experience helping clients manage the legal and financial complexities of divorce, including QDRO preparation, 401(k) splits in Illinois, and pension division in high-net-worth divorce.

Call (312) 332-2915 to schedule a consultation, and let us help you make the right decisions today for a more secure tomorrow.