How to Split Retirement Assets in a Divorce

Retirement assets refer to plans like the 401(k) and 403(b), IRAs, annuities, and pension plans. They are important assets to grow throughout a career because they allow individuals and their spouses to live comfortably following their retirement. These accounts are held 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.

For many couples, retirement accounts make up a considerable amount of their total combined net worth. It is no surprise that it is a large area of concern when it comes to divorce proceedings. So what exactly happens to retirement assets in a divorce?

Retirement funds that are added to the account during the course of a marriage are considered marital property. As such, these funds are subject for division between spouses in the event of a divorce. However, if one spouse enters into the marriage with money already saved in their retirement plan, those funds are considered to be separate property and are not subject for division. There may be an exception to this rule if the value of those funds increased over the life of the marriage. In that case, a portion of those funds may then be considered marital property. 

So, retirement funds that qualify as marital property can and will be divided. However, the way in which courts go about this depends on multiple factors. For one, states dictate their own laws for how IRAs are to be divided during divorce. The state of Colorado follows the marital property or “equitable distribution” law. This means that marital property should be divided equitably, but not necessarily equally. 

Your divorce settlement agreement should have clear instructions for how assets and funds will be divided and how they’ll be transferred. If your settlement agreement shows that you intend to divide retirement funds, the court must order a QDRO.

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 account and pension funds from one spouse to another.

A QDRO 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 alternate payee both while the participant is still alive and after he or she dies. These are what are known as survivor benefits.

One of the purposes of a QDRO is to grant protection to spouses. It guarantees that the funds in a retirement plan cannot be separated or withdrawn without penalty and then deposited into the non-employee spouse’s account.

A QDRO only applies to plans that are covered under the Employee Retirement Income Security Act (ERISA) and that are IRS tax-qualified, including 401(k)s and 403(b)s. These orders do not apply to military and government pensions, as those are governed by separate laws.

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/retiree attains a portion of the retirement benefits in the event of a divorce.

How to Protect Your Retirement Assets in Divorce

To protect your retirement assets in a divorce, you need to do your homework. What we mean by this is to take the time to understand the general rules of how plans are to be divided in your state. Having a better understanding of your assets and liabilities can help prepare you for what will happen when it comes time to divvy them up. Both participants and alternate payees have the right to obtain all information regarding the retirement plan and account balances at any time.

Another way, perhaps the best way, to protect your retirement assets in a divorce is to take precautions ahead of time. Though no one likes to think their marriage won’t last forever, it is safe to assume that there is a possibility that it won’t. Before divorce is even considered, sit down with your spouse and have a discussion about how you would like your assets to be divided. If you can come to a resolution, a prenuptial or postnuptial agreement would be the best measure you could take to protect your assets.

Another wise measure to take to protect you retirement assets in a divorce would be to get professional legal representation. Even if it all seems to be relatively uncontested and straightforward, it is still important that a lawyer reviews the division of assets such as retirement funds. 

At Litvak Litvak Mehrtens and Carlton, P.C., our Denver divorce attorneys have over six decades of experience in divorce proceedings and the division of property. 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.