IRAs During Divorce in Colorado

Retirement accounts, pension, IRAs and Roth IRAs are all considered property.  In most instances, to the extent the accounts grew in value during the course of the marriage, that property is considered marital property.  For example, if you opened up an IRA with $10,000 before you got married, and the account is now worth $100,000, $90,000 of the account would be considered marital property and is subject to being divided equitably.

If the court and the IRA and/or qualified-plan custodians recognize your divisions as transfers incident to divorce, there won’t be immediate tax consequences for you or your ex-spouse. However, lack of attention to detail in this case can make the divorce process much more difficult and expensive, especially if you’re going through a high asset divorce. 

In general two types of IRAs exist: a traditional IRA and a Roth IRA.

A traditional IRA allows you to save up to $5,500 a year (or $6,500 a year, if you’re fifty or older.)  Your contributions to a traditional IRA aren’t taxed. The growth in value of the account is not taxed while it remains in the account.  However, when you start to draw the amounts out (after your age 59 ½), you’ll be taxed at the future ordinary income tax rate for the amount you take out.

A Roth IRA has the same contribution limits as a traditional IRA.  But, in a Roth IRA, your contributions are taxed in the year they are made.  Like the traditional IRA, the account grows tax-free.  The key benefit to having a Roth IRA is that, when you take the money out of the account at retirement, no taxes are due, since you paid taxes on the initial amounts that went into the account.

IRA custodians will require a copy of the dissolution judgment or order before a transfer will be initiated, in most cases. If the entire IRA needs to be transferred to the other spouse, the tax laws permit a transfer of ownership through name change on the IRA account. But, many custodians require the spouse who’s receiving the IRA to create a new account. Additional documentation may be needed to change ownership of the title on the asset. 

If only a portion of the IRA needs to be transferred, the receiving spouse must establish a new IRA or designate an existing IRA to receive the transfer. The court-approved agreement or the Court order will direct the IRA custodian to transfer a fixed dollar amount or a percentage of the IRA directly to the custodian of the former spouse's IRA. 

Most commonly, assets are not liquidated to accomplish the division.  Instead, a percentage of each stock, bond, or other asset in the account is transferred to the new account.  Once the transfer is completed, the receiving spouse has exclusive authority over the account:  he or she must follow the rules for IRA contributions and distributions, and the taxes and any penalties that are involved in withdrawing funds will belong to the account holder.

You may think that because you purchased something in your name, it is separate property. This is not always the case. If you bought the property within the marriage (even if it’s in your name) it's up for division.

The same goes for retirement accounts. If you believe everything in your account is yours to keep in the event of a divorce, you would be wrong. If the retirement account increased in value over the duration of the marriage, it may be up for division.

It may feel like nothing is safe from division at this point. Social security is one of the few exceptions. The courts are not able to divide this. But, if the spouse is 62 years or older and the marriage lasted for 10+ years, the other party may still receive benefits. Though it is not able to get divided between the two of you.

The division of an IRA is decided in the divorce itself. If you want to avoid a tax penalty for the spouse whose name isn’t on the IRA, you’ll need to set up a new IRA, or the proceeds of the other spouse’s IRA should be transferred to another existing IRA. 

There are other issues to consider. For instance, you’ll want to consider possible delays that can come about when having to transfer funds in an IRA during a divorce settlement or judgment. If the account increases or decreases in value in this time, who gets the increase and who is charged for the decrease?

Also in a high asset divorce, it’s sometimes difficult to uncover the entirety of the financial circumstances. In some cases, spouses may hide assets to avoid division or increasing their amount in spousal maintenance. 

Your lawyer will work to uncover any of these hidden assets to ensure you get a fair distribution. 

Once all the assets have been made known, the judge will determine the need for spousal support. Some of what they will consider include:

• Gross income of each party
• Age and physical health of each party
• Distribution of marital property
• Financial resources of each party and their contributions to the marriage
• Financial need and lifestyle established by the marriage
• The employment status/ability for employment of each party

If the judge decides that support is appropriate in your case, they determine the amount using a specific formula. This is 40% of the higher earning income minus 50% of the lower earning income. Though this is generally the formula used, it is not always set in stone. Every circumstance and court is different and unique to each party.

Transferring or dividing a traditional or Roth IRA incident to a divorce doesn’t require a Qualified Domestic Relations Order, or QDRO. Although, at face, the process may appear to be simple, it still requires some care. If this isn’t done correctly, the account owner will have to pay unnecessary taxes or penalties. 

But, if the retirement plan being transferred is one sponsored by one spouse’s employer, you will likely need a QDRO to transfer the asset.  This takes on some different issues and a different form of method for division if the employer is the Federal, State, or municipal government. 

Divorce constitutes one of the few exceptions to protections from seizure or attachment by creditors or lawsuits that federal law attaches to qualified retirement plans. Divorce and separation decrees allow the attachment of qualified-plan assets by the ex-spouse of the IRA account owner, if the spouse uses a Qualified Domestic Relations Order.  Sometimes, if child support or spousal maintenance aren’t paid, a QDRO can be used to collect the amounts in arrears.  

After you’ve received your IRA or qualified-plan assets, Colorado will no longer treat your former spouse as your survivor in case of your death.  There are exceptions to this, because sometimes and IRA or other retirement account is used as security for child support or spousal maintenance that remains due after your death.  To make sure your intentions are clear, you’ll want to update the beneficiaries designated with these accounts. You’ll also need to update beneficiary designations on other accounts, including your annuities, life insurance policies, and your will and any trust documents.