In Colorado, assets acquired during marriage are equitably divided between spouses in divorce. Retirement funds are often the largest liquid asset involved in divorce, and come with a lot of complex issues when it comes to division. The largest of these issues is taxes, and depending on the type of retirement fund you have, there could be financial ramifications of dividing retirement money that you should be aware of before a divorce is finalized.
Proper Division Of IRAs
When transferring assets from one spouse’s IRA to another’s, you must label the transfer as “incident to divorce.” This is necessary to avoid penalties for early withdrawal from the IRA. Both the sending and receiving IRA custodians must sign off on the transfer and it must be approved by a judge. This process must be completed within one year of a divorce settlement to avoid review by the Internal Revenue Service.
Proper Division Of Qualified Plans, Such As 401(k)s, Defined Benefit Plans & Pensions
To divide a qualified plan between two parties, you need a qualified domestic relations order (QDRO). A QDRO is a court order that recognizes a former spouse’s interest in their spouse’s qualified plan assets. Using a QDRO, the “participant” transfers assets into the “alternate payee’s” IRA or qualified plan. Much like transfers incident to divorce, these must be reported correctly to the courts and retirement custodians to avoid any unfortunate tax penalties.
If you have questions regarding the division of your retirement accounts in a Colorado divorce, our Denver divorce attorneys are well-equipped to assist you.