Don’t forget retirement accounts during property division

On Behalf of | Nov 19, 2015 | Property Division

Financially responsible couples in Colorado tend to plan ahead for most major life events. Planning for retirement often involves establishing one or more retirement accounts at a young age, either through an employer or an outside account. However, handling these retirement accounts in the event of a divorce can be tricky. There are often penalties for withdrawing funds before retirement, making simply hacking retirement funds in two and doling out each half during property division a less than ideal approach.

As it currently stands, different retirement plans have different rules that govern how they are divided in the event of a divorce. For instance, 401(k)s — an exceptionally popular choice for retirement accounts — can be handled with a Qualified Domestic Relations Order, or QDRO. A QDRO is a legal document that specifies exactly how much each party is entitled to, locking in the amount that an ex-spouse is privy to even if one person chooses to continue to contribute to their employer-offered 401(k). Perhaps even more appealing, a QDRO effectively eliminates the typical penalties and taxes that come along with early withdrawals.

While especially effective and mostly beneficial to both parties, QDROs do not apply to individual retirement accounts. The term individual can be somewhat misleading, but it does not indicate that it is individual or personal property, simply that it is not an employer-sponsored account. The handling of these individual accounts can be somewhat more complicated and must be handled through transfer incidents. Like the QDRO, it is also a way to move funds without paying out for taxes; however, any misstep along the way can create unexpected owed taxes from the IRS.

When married, retirement accounts are seen as a marital assets with all contributed funds during the marriage for the use of both parties during future retirement. Like all other marital assets, retirement accounts must be addressed during property division. For the best results possible, Colorado couples are well-advised to provide the most relevant and up-to-date financial information regarding their retirement accounts.

Source: Time, “Divorce: Who Gets Retirement Accounts?“, AJ Smith, Nov. 15, 2015