Colorado courts have long held that retirement accounts are just as much as part of marital property as an other investment or savings account, and therefore subject to an equitable division in a divorce.
But the process and methods of dividing retirement accounts in a divorce is simply baffling to a lot of people. You have to consider each spouse’s current cash flow, the different account types, the tax consequences, and withdrawal penalties.
If the account was established during the marriage, then it is highly likely that the entire balance will be considered marital property and subject to an equitable division between the parties.
If it was started prior to the marriage, then the increase in value of the account, including earned interest and contributions from both the owner and employer, is considered marital property.
For the moment, think of a retirement account as a savings account with withdrawal restrictions. Because that’s really what it is. You are putting money into a savings account now, and waiting to withdraw it later. In exchange for receiving tax benefits on your account deposits now, you can’t withdraw it until later. Your employer may deposit funds into your savings account, but you can’t withdraw those funds until you’ve been with the company long enough.
Obviously, it’s not that simple. But for the purposes of a divorce, let’s just keep it simple. The problems arise when some or all of the money in the account has to be withdrawn now due to a divorce. How do you ensure the least possible tax and withdrawal penalties when you take the money out of the retirement account now?
When retirement fund transfers get complicated, many attorneys turn to Certified Public Accountants (CPAs) and Certified Financial Planners (CFPs) to ensure that all Internal Revenue Service (IRS) regulations and rules are followed.
What is a QDRO?
A Qualified Domestic Relations Order (QDRO) is a court order that enables the transfer of pension and 401(k) retirement account funds to a spouse. If the funds are transferred or deposited in a similar qualified account through a rollover to a new or existing IRA, no tax penalty occurs. Any distributions or cash-outs taken by the recipient after the transfer are charged to the recipient.
If the party receiving the money needs the cash, then the cash out is subject to withholding and income tax. If the person receiving the money is under the age of 59.5 years, then the payout may also be subject to an early withdrawal penalty. Typically, the taxes and withdrawal penalties are charged to the recipient.
What is a PERA DRO?
The Colorado Public Employees Retirement Association (PERA) provides retirement benefits to over 500 public entities in Colorado, including government agencies and public school districts. Divorces involving PERA participants require strict adherence to the applicable Colorado state laws.
Retirement funds transferred as part of a divorce settlement or court from a PERA participant’s account must be done with PERA’s own Domestic Relations Order (DRO).
Experienced attorneys will submit divorce agreements involving PERA funds to PERA for approval prior to finalizing a divorce.
In fact, PERA states on its website that “No payment will be made to the [divorcing spouse] unless and until Colorado PERA has reviewed the Agreement and Domestic Relations Order … and determined that it complies with the statutes, rules, and procedures governing the Colorado PERA plan and DROs.”