This article will discuss if IRA withdrawals are considered income and should be subject to alimony and child support in Illinois. We will discuss the following topics:
- How do Illinois courts define "income?"
- Inherited Versus Preexisting IRAs
- Is the law the same across all of Illinois?
Preexisting retirement accounts are almost always factored into divorce negotiations, especially if one spouse was the family's primary income. But if an ex-spouse receives money from a normally scheduled IRA distribution, is it considered income? What if funds are withdrawn before the IRA matures? If the divorce is finalized and an ex-spouse receives an IRA from an inheritance, can the funds be subject to alimony or child support? Illinois residents might be surprised to find out that it depends on what county you live in and the time when the funds are distributed or withdrawn.
How Do Illinois Courts Define Income?
Under Illinois law, the term "gross income" is defined as "all income from all sources." It is applied the same for child support and maintenance payments. In the past, the Illinois Supreme Court has treated income as funds that a person receives on an incremental basis, a "gain or recurrent benefit that is usually measured in money." The definition goes on to include gifts, investments, employment, royalties, etc. The "income" does not have to be taxed to you to be subject to alimony and child support. Different courts throughout Illinois might apply a different definition and thus end up with a different ruling for the same scenario. One thing that all courts in Illinois seem to agree on is that money drawn from a savings account, even that which is drawn incrementally, is not considered income. The funds in a savings account already belong to the individual, and when making a withdrawal, they are not "receiving money" or "increasing their wealth."
Inherited Versus Preexisting IRAs?
When a couple gets divorced in Illinois, all marital assets are divided under equitable division, including retirement accounts. Equitable division views marriage like a fifty-fifty business partnership. Everything that happened during the marriage is considered marital property and should be divided to allow both parties to maintain a lifestyle similar to what they had before the divorce, or as close as possible. Retirement accounts are often split, so one would think that distributions wouldn't be subject to alimony or maintenance, but that is not always the case. However, the court will try to make every attempt to include future income in the final divorce decree, decreasing the chance that the divorced couple returns to court. Both ex-spouses have the same ability to withdraw funds, invest, or do whatever else they want with the IRA. If one spouse draws funds, most courts will treat those funds as already owned by the individual and not a source of income.
An inherited IRA is a different story. If an ex-spouse inherits an IRA after the court finalizes the divorce, the other party could petition the court to modify the existing child support or maintenance agreement. Further, if the divorce agreement had one ex-spouse paying a flat percentage of income, the court might include a withdrawal or distribution in the income calculation. Thus, a divorced individual who inherits a retirement account should assume it will be treated just like any other monetary inheritance: subject to alimony and child support.
Is the Law the Same Across All of Illinois?
No. Some district and appellate courts in Illinois have ruled that IRA disbursement and withdrawals constitute income for child support and maintenance purposes, regardless of whether the IRA was part of the property settlement or inherited. Other courts have upheld the argument that the funds in an IRA, much like a savings account, are already owned by the individual and that categorizing withdrawals and distributions as income is "double counting." If you're unsure of where your district stands, a divorce attorney can help you figure out what to do next. If you have questions about IRAs and other retirement accounts and how they factor into alimony and child support payments, please give us a call.
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