401Ks and IRAs In a Divorce

For most Colorado divorces, retirement accounts such as 401Ks and IRAs are the most substantial assets spouses bring to the table when dividing their marital assets and debts. Colorado divorce law requires spouses to divide their assets in a “fair and equitable” way if not exactly 50/50. Spouses who file for divorce after long-term marriages often have substantial 401K and IRA accounts, often leading to hotly contested divorces.

Before beginning the divorce process in Colorado, it’s important to know how the state’s equitable distribution of assets laws impact your retirement savings. Dividing 401ks and IRAs during a Colorado divorce has a substantial impact on the financial future of both spouses.

What Does “Equitable Division” of Marital Assets Mean In a Colorado Divorce?

Unlike the handful of community property states that require a nearly exact 50/50 division of marital assets and debts, Colorado’s equitable division of property law allows spouses more room to negotiate a fair division of their property, assets, and debts. Divorcing spouses negotiate this division through their family attorneys in Fort Collins and one or more sessions with a professional mediator who offers solutions for common disputes. When spouses reach a settlement agreement on all divorce terms, including child custody, spousal support, and the division of their assets—including their 401K or IRA accounts— their attorneys present the agreement to the judge who signs it into binding orders without the need for a trial.

Understanding Separate and Equal Property During a Divorce In Colorado

Like other marital assets, such as real estate property, vehicles, and valuables, understanding the division of a 401k or IRA during divorce depends on the account’s status as a separate or marital asset. Separate assets in Colorado divorces are those assets and accounts belonging to one spouse before the marriage. Marital assets are properties and accounts obtained or opened during the marriage. However, even when one spouse’s 401k or IRA began as a separate asset, the other spouse could claim a portion of the asset due to the commingling that occurs during a marriage.

How Does Comingling Assets Impact IRAs and 401Ks In a Divorce? 

Comingling assets is a common occurrence during a marriage, particularly between spouses without a prenuptial agreement delineating their separate assets and protecting them from commingling. There are many ways that one spouse’s separate asset commingles with a spouse to become a joint asset. For example, when one spouse spends time, talent, or money improving the other spouse’s real estate property, they have a valid claim for half of the asset’s increased value. Similarly, when one spouse allows the other access to a 401K or IRA account, or one spouse’s income allows the other spouse to place a higher percentage of their income into a 401K or IRA, the spouse has a right to claim half of the asset’s increase in value that occurred during the marriage.

Dividing IRAs and 401Ks During a Divorce

Dividing 401Ks and IRAs during a Colorado divorce quickly becomes complex because plan administrators typically cannot divide an account without a court order. A Qualified Domestic Relations Order (QDRO) provides details to a plan administrator for the terms of the division of a 401k account. To obtain this court order first requires determining the increased value of the account during the marriage and a spouse’s fair share of that increased value. Once the spouses’ attorneys determine the marital portion of one spouse’s 401K account, they must petition the court for a QDRO outlining the fair and equitable division of the account to each spouse.

When dividing retirement accounts, it’s important to minimize early withdrawal penalties and taxes by choosing the best possible strategy. Common strategies for dividing 401Ks and IRAs include the following:

• Rolling over a spouse’s share of the funds into the other spouse’s existing or new IRA or another compatible retirement account
• The spouse with the 401K or IRA retains the account in trade for a marital asset of equal value such as the family home
• Taking a distribution directly from a 401K account with the tax exemption included in the QDRO for those under age 59.5. (This option does not apply to IRA accounts, which need to be rolled over to another IRA to avoid early withdrawal penalties)

If one spouse needs an immediate source of income or an influx of cash, the account holder can withdraw the other spouse’s share of a 401K or IRA, but the account administrator withholds the early withdrawal tax penalty from the spouse’s share.

What Can Affect the Distribution of an IRA or 401K Plan During a Divorce In Colorado?

During mediation and negotiations for a settlement agreement, there are several factors that impact the fair and equitable distribution of IRAs, 401Ks, pensions, and other retirement accounts. A judge considers the same factors if the spouses cannot reach a settlement agreement and must present their arguments in court. When determining a fair division of these accounts between divorcing spouses, Colorado considers the following:

• The duration of the marriage: the longer the spouses were married, the larger the portion of one spouse’s account that’s subject to fair division
• Whether or not the non-account-holder spouse has separate assets of equal value, such as their own IRA, 401K, or pension plan
• The division of the marital debts: if one spouse takes a greater portion of the marital debt they may receive a greater percentage of the 401K or IRA in compensation
• If one spouse made non-financial contributions during the marriage, such as supporting the other through their education or career advancement or electing to stay home to care for children and the home during the marriage

An experienced Fort Collins divorce lawyer examines all options to protect their client’s best interests during the division of marital assets and debts in a divorce, including IRA and 401K accounts.

How Can a Colorado Divorce Lawyer Help?

Protecting your rights and best interests throughout all aspects of a divorce in Colorado is critical to your ability to move forward under the best possible financial circumstances after the divorce. Protecting your portion of a substantial 401K or IRA account is a crucial part of the division of your assets. Call The Law Offices of Stephen Vertucci for experienced representation throughout your Colorado divorce.