RETIREMENT ASSETS AND DIVORCE
How to Split Retirement Assets in a Divorce
Divorce is complicated enough emotionally. What makes it worse is the money involved, child support, property rights, and retirement asset division. Divorce attorneys at Litvak Litvak Mehrtens and Carlton want to make your retirement asset division during divorce as easy as possible. Spouses can split their retirement assets via QDRO Colorado or “transfer incident to divorce.” Call us today at 303-951-4506 for more information.
What are Retirement Assets?
Retirement assets refer to plans like the 401k and 403b, IRAs, annuities, QDRO Colorado, and pension plans. They are important assets to grow throughout a career because they allow individuals and their spouses to live a comfortable retirement. These accounts exist in a financial institution such as a bank, and removing these funds before a certain date can result in penalties. Retirement assets, such as IRAs, can complicate the common grey divorce.
What Happens to Retirement Funds in Divorce?
For many couples, retirement accounts make up a considerable amount of their combined net worth. It’s no surprise that retirement funds are a major concern during divorce proceedings. So what exactly happens to retirement assets in a divorce?
Retirement funds added to a plan during the course of marriage are marital property. As such, these funds are subject for division between spouses if they divorce. However, if one spouse enters into the marriage with money already saved in their retirement plan, those funds are separate property and aren’t subject to division. There may be an exception to this rule if the value of those funds increased over the course of the marriage. In that case, a portion of those funds may then be considered marital property.
How is Marital Property Divided in Colorado?
Each state generally dictates their own laws for how IRAs are to be divided during divorce. The state of Colorado follows the marital property or “equitable distribution” law. In other words, the law divides marital property equitably, but not equally.
Your divorce settlement agreement should have clear instructions for how the court will divide and transfer assets. If your settlement agreement shows that you intend to divide retirement funds, the court must order a QDRO Colorado.
What is a QDRO Colorado?
In the process of divorce, you might hear the acronym QDRO come up (pronounced “quad row”). A QDRO is a Qualified Domestic Relations Order, which is a court decree related to aspects of divorce such as alimony, child support, and property rights. It also allows the transfer of retirement accounts and pension funds from one spouse to another.
How does a QDRO Colorado Work?
A QDRO Colorado instructs the “participant,” or original account owner, on how to pay a share of their benefits to the “alternate payee,” or spouse. The order provides benefits to the spouse both while the participant is still alive and after they die. Basically, the order refers to this as survivor benefits.
One of the purposes of a QDRO is to grant protection to spouses. The order basically can’t separate or withdraw retirement funds without penalty. Additionally, the order can’t deposit the funds into the non-employee spouse’s account.
The Colorado Public Employees Retirement Association, aka PERA, has its own Domestic Relations Order – PERA DRO. The association provides retirement benefits to over 500 public Colorado entities, including public school districts and government agencies. The PERA DRO is the means by which the spouse of a PERA member or retiree receives a portion of the retirement benefits if a divorce happens.
Common Types of Retirement Plans
Whether you’re trying to figure out which retirement plan is best for you or which retirement plan divides the easiest during divorce, here’s the breakdown.
An IRA is a common retirement plan created by the U.S. government. There are many types of IRA’s that Americans can choose from. All of the plans operate differently and provide different benefits.
Traditional IRA: This type of IRA plan is certainly the most popular because of the valuable tax benefits that it offers. Basically, a traditional IRA works by allowing you to save for retirement with pre-tax money. Money that you put into the plan will increase without taxes until it’s withdrawn for retirement.
Roth IRA: This type of IRA plan works by saving after-tax money. Basically, the money will increase tax-free. Additionally, you will be able to withdraw the money without paying taxes to do so.
Spousal IRA: This type of IRA plan allows an employee and their spouse to contribute to the same retirement plan. But there is a catch. The taxable income of the spouse must be more than any IRA payments.
Rollover IRA: The money you put into a rollover IRA is “rolled over” money from a different retirement plan, such as a 401k or a different type of IRA plan. The downside of a rollover IRA is that you can suffer from a significant amount of tax debt due to the transfer.
SEP IRA: This type of plan is specifically for small business owners, their employees, and self-employed people as well. Basically, a small business owner is the only one who can contribute to the plan. But all the money goes into a SEP IRA plan for each employee instead of a trust fund.
SIMPLE IRA: This type of plan stands for Savings Incentive Match Plan for Employees. With this type of plan, an employer and their employees can put aside a specific percentage of money for retirement. Similarly to traditional and Roth IRA plans, this money will increase without taxes until it’s withdrawn for retirement.
A 401k is another popular retirement plan option that’s named after subsection 401k in the U.S. Internal Revenue Code. Basically, a 401k is a type of retirement plan offered by an employer. It enables an employee to save a portion of their pre-tax earnings for retirement. Sometimes, employers even offer to match an employee’s 401k contributions. There are two different types of 401k plans: traditional and Roth. The main difference between the two plans is when you pay taxes.
Traditional 401k: Payments that a person makes to this 401k are with pre-tax dollars. This basically means that you won’t have to pay taxes until you withdraw your retirement money.
Roth 401k: A Roth basically works opposite of a traditional 401k. You must make payments with after-tax dollars which means you pay taxes in advance. But on the bright side, you won’t have to pay taxes when you withdraw your retirement money.
IRA Division During Divorce
In order for retirement asset division to work and conclude smoothly, a couple must specify which type of division they want: transfer incident to divorce or QDRO? The former deals with IRA division. Meanwhile, the latter deals with 401k division.
When a couple is going through a divorce, a court will divide their IRA’s with a process called “transfer incident to divorce.” Basically, if you give your spouse half of your IRA using this method, they will be responsible for paying taxes on any distributions made from the account once they receive your half of the IRA money. Additionally, you won’t have to pay taxes on the money sent to your spouse.
401k Division During Divorce
A QDRO Colorado only applies to retirement plans that are covered under the Employee Retirement Income Security Act (ERISA). However, the plans must be IRS tax-qualified and 401k’s and 403b’s fall under that category. In order to have tax-free transactions using this 401k division method, they must be properly reported to the courts and IRA custodians. The spouse who receives this retirement money can roll it into any IRA plan.
How to Protect Your Retirement Assets in Divorce
Divorce is complicated enough due to the emotional turmoil alone. The last thing you want to focus on is all the money involved, including retirement money. But protecting your retirement money is crucial.
Do Your Homework
To protect your retirement assets in a divorce, you firstly need to do your homework. This means that you need to understand the general rules about how courts divide retirement plans in your state. Having a better understanding of your assets and liabilities can prepare you for when the division happens. Both participants and alternate payees have the right to obtain all information regarding the retirement plan and account balances at any time.
The best way to protect your retirement assets in a divorce is to take precautions ahead of time. Although no one likes to think that their marriage will ultimately end in divorce, there’s always a possibility that it will. Before divorce is even considered, sit down with your spouse and have a discussion about how you would like to divide your assets. If you can come to a resolution, a prenuptial or postnuptial agreement is the best measure you could take to protect your assets.
Have an Experienced Lawyer On Your Side
Lastly, get professional legal representation in order to protect your retirement assets. Even if the divorce seems to be relatively uncontested and straightforward, it’s still important for a Denver divorce lawyer to review the division of assets, such as retirement funds.
Call a Denver Divorce Attorney Today
At Litvak Litvak Mehrtens and Carlton, our Denver divorce attorneys have over six decades of experience in divorce proceedings and property division. We know what it takes to protect you, your assets, your rights, and your future. To arrange a consultation today, call us at 303-951-4506 or complete the contact form shown here.