Can You Be Ordered to Use Your Retirement Savings to Pay a Divorce Settlement?

 Posted on June 17, 2025 in Asset Division

In a divorce, retirement savings are often one of the most valuable assets on the table. Many spouses assume these funds are untouchable until retirement or that they can only be divided through a standard Qualified Domestic Relations Order (QDRO). However, Illinois courts have broad authority under the Illinois Marriage and Dissolution of Marriage Act to divide all marital assets equitably, and in some cases, a judge may order one spouse to use retirement savings to satisfy a divorce settlement.

This can come as a shock, especially when it might mean early withdrawals, tax penalties, or a loss in long-term financial security. For anyone going through a divorce, especially where other assets are limited or there is a lot of financial complexity, it is essential to understand how the court views retirement accounts and when they may be used to equalize a settlement. Our Kane County, IL divorce attorneys are here to help. 

Retirement Accounts as Marital Property

Under 750 ILCS 5/501, retirement savings accumulated during the marriage are considered marital property, regardless of which spouse’s name is on the account. This includes 401(k)s, traditional and Roth IRAs, pensions, and other qualified retirement vehicles. Contributions made before the marriage are generally non-marital, but any growth or new deposits during the marriage are subject to division.

These accounts are often divided through a QDRO, which is a court order that allows funds to be transferred between spouses without triggering immediate taxes or early withdrawal penalties. But in some cases, the issue is not just division but whether one spouse must draw from retirement to satisfy a larger financial obligation.

When the Court Might Order You to Use Retirement Funds to Reach a Divorce Settlement 

Illinois courts aim to divide marital property equitably, not necessarily equally. If one spouse receives a larger share of other marital assets, such as the home or business interests, the court may require the other spouse to "make up the difference" through a cash settlement. When liquid assets are insufficient, the judge may look to retirement savings as a potential source of funds.

This issue often arises when:

• One spouse is "asset rich" but "cash poor"

• The other spouse is awarded full ownership of a home, vehicle, or business

• Marital debt is disproportionately allocated

• There is a large disparity in earnings or financial position after divorce

If the obligated spouse lacks cash and borrowing options, the court may allow—or in some cases, require—the use of retirement funds to fulfill the settlement.

Tax Penalties and Early Withdrawals

One of the greatest risks of using retirement savings to satisfy a divorce settlement is the possibility of incurring early withdrawal penalties. The IRS imposes a 10 percent penalty on early distributions from most retirement accounts if the account holder is under age 59½. In addition to the penalty, the distribution is taxed as income in the year it is withdrawn.

A properly drafted QDRO allows for a transfer of retirement funds from one spouse to the other without triggering these taxes or penalties. The receiving spouse can roll the funds into their own IRA or other qualified plan. However, if the account holder withdraws the funds in cash rather than transferring them, they will face tax consequences.

Alternatives to Drawing Retirement Funds in a Divorce Settlement

A Certified Financial Litigator can help spouses explore alternatives before accessing retirement funds. Depending on the circumstances, those alternatives may include:

• Structured settlement payments over time rather than a lump sum

• Offsetting the retirement account against other marital property

• Refinancing or borrowing to satisfy the obligation

• Negotiating a payment plan within the divorce agreement

Financially savvy legal counsel can also advise on how to use QDROs strategically to reduce tax impact and preserve as much long-term savings as possible.

What Happens If You Refuse to Use Retirement Funds in a Divorce Settlement?

If the court determines that retirement funds are the only viable source for satisfying a divorce settlement, a refusal to comply can lead to contempt proceedings. Judges have the power to enforce their orders through fines, wage garnishment, or even asset seizure. However, courts typically provide flexibility in how orders are structured and will often consider the long-term impact on both parties’ financial futures.

Work With a Kane County, IL Divorce Attorney Who Understands Financial Strategy

If your divorce involves significant retirement savings or if you are being asked to use your retirement to satisfy a settlement, you need more than basic representation. You need an advocate with the financial insight to protect your future. At Weiler & Associates, Inc., our firm has a Certified Financial Litigator on staff who combines legal experience with real financial fluency.

Call our St. Charles, IL divorce attorney at 630-331-9110 to learn how to protect your retirement during a divorce.