How Are Retirement Accounts Divided in Divorce in Colorado?

In Colorado, one of the most significant assets a couple may have is their retirement accounts.

Understanding the division of retirement accounts in a divorce in Colorado is often misunderstood. Many employees mistakenly believe that their retirement savings constitute separate property. As a result, they may overlook these assets during the preparation of marital settlement agreements. However, Colorado law typically views these accounts as marital property, subject to equitable distribution between spouses regardless of whose name is on the account. This misunderstanding can lead to disputes when parties realize how Colorado law treats these accounts in the event of a divorce.

Petrelli Previtera, LLC is a family law firm that can help you handle the division of pension and retirement accounts in a Colorado divorce. Our goal is to provide accurate information and guide you through this process. If you have more questions, don’t hesitate to schedule a consultation with one of our attorneys. Our attorneys can work with  you to review your assets and understand your unique situation. They will apply their knowledge of Colorado law to provide you with an analysis of what to expect in your specific situation. Whether it involves a 401k, a pension, an IRA, or other types of retirement accounts, we can help you navigate the intricacies of asset division during divorce. We are committed to helping our clients understand their rights and options, making sure they are prepared for the road ahead.

What Are Retirement Accounts?

Retirement accounts are financial plans that allow individuals to accumulate funds for retirement. These accounts offer tax advantages to encourage individuals to save for the future. Common types of retirement accounts in Colorado include:

• 401(k): Employer-sponsored retirement plans that allow employees to contribute a portion of their salary to a tax-advantaged investment account.
• 403(b): Similar to a 401(k) but offered by certain non-profit organizations, such as schools and hospitals.
• IRA (Individual Retirement Account): A personal retirement savings account that individuals can set up independently, offering various investment options and potential tax benefits.
• Pension Plans: Employer-funded plans that provide employees with a fixed income during retirement, typically based on salary and years of service.
• Government Pension Plans: These encompass a range of retirement benefits offered to government employees. They often provide a secure income during retirement and may include benefits for the survivor upon the employee’s death.
• Railroad Retirement Board (RRB) Benefits: Specifically for railroad workers, these retirement benefits provide pension-like benefits and, in certain cases, encompass disability and survivor benefits as well.
• Military Retirement Benefits: Provided to veterans who have served in the armed forces. The exact benefits can vary significantly, depending on factors such as the length of service, rank, and when the person was serving.
• Social Security Benefits: These are benefits provided by the U.S. government to retirees who have paid into the Social Security system through their payroll taxes. The amount of benefit depends on the retiree’s earnings history and the age at which they begin to take benefits.
• Savings Incentive Match Plan for Employees (SIMPLE) IRA: A type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for retirement.
• Simplified Employee Pension (SEP) IRA: A provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name.
• Thrift Savings Plan (TSP): A retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve.

Colorado Property Division Laws

In Colorado, property division during a divorce follows the equitable distribution law, aiming for a fair, though not necessarily equal, split of marital assets. The court considers factors such as each spouse’s financial contributions, duration of the marriage, and individual needs.

One area where this law significantly impacts is the division of pension and retirement accounts. The court will assess the total value of these accounts and determine a fair distribution according to relevant factors. This approach ensures that the division of property considers the unique circumstances of each individual involved.

The equitable distribution law in Colorado, also known as the Marital Property Act of 1987, marked a departure from the previous ‘title-based’ system. Prior to 1987, the name on the title of the property, also known as the ‘title theory,’ determined its ownership during divorce proceedings. However, this approach was criticized as it often left economically disadvantaged spouses vulnerable.

In response, the Colorado legislature enacted the Marital Property Act of 1987 to ensure a fair distribution of marital assets upon divorce. In essence, the law classifies all property acquired by either spouse during the marriage as marital property, regardless of the title, and mandates its equitable distribution.

One of the significant changes came in 1995, when the law was amended to include increases in the value of separate property due to efforts or contributions of the other spouse during the marriage, further entrenching the concept of fairness in asset division.

The overarching goal of this law is to provide a fair and equitable division of marital property, taking into account each spouse’s contributions and needs. By doing so, it aims to minimize the economic hardship typically associated with divorce, especially for the more economically vulnerable spouse.

The impact of this law has been profound. It has provided a more balanced financial outcome for divorcing couples, preventing unjust enrichment of one party at the expense of the other. It has also contributed to a shift in societal attitudes, recognizing that both spouses contribute to the accumulation of marital wealth and should, therefore, share its distribution equitably.

While Colorado property division laws are designed to consider each couple’s circumstances, some nuances may arise during the divorce process. That’s why having a skilled family law attorney in your corner can be essential to ensuring a fair asset distribution.

The Process of Dividing Retirement Accounts in Colorado Divorce

The division of pension retirement accounts in a Colorado divorce involves several steps:

1. Identifying and Valuing Retirement Accounts

Both spouses must disclose all their financial assets, including retirement accounts such as 401(k)s, IRAs, pensions, and other employer-sponsored plans. The value of these accounts is often determined with the help of financial professionals.

2. Determining Marital and Separate Property

In Colorado, property acquired during the marriage is considered marital property, while acquired before marriage or acquired as a gift or inheritance during marriage is considered separate property. However, this distinction can become complex for retirement and pension accounts.

In most cases, the portion of the retirement account accumulated during the marriage is considered marital property and, therefore, subject to division. Any contributions made before the marriage or after separation are usually regarded as separate property.

4. Receiving a Qualified Domestic Relations Order (QDRO)

To divide certain types of retirement accounts like 401(k)s or pensions, a court-ordered document called a Qualified Domestic Relations Order (QDRO) is often required.

The QDRO outlines how the retirement benefits will be divided between the spouses.

5. Court Approval

Once the QDRO is prepared, it needs to be submitted to the court for approval.

The court will review the QDRO to ensure it complies with state and federal retirement account division laws.

6. Distribution of Assets

After court approval, the retirement account administrator will implement the division specified in the QDRO.

Depending on the type of account, this may involve creating a separate account for the non-employee spouse or directly transferring funds.

Potential Penalties and Strategies to Avoid Costs

The division of retirement accounts in a divorce proceeding often involves the risk of incurring penalties, such as early withdrawal penalties, especially when cashing out retirement accounts before reaching the age of 59 and a half. However, there are strategies to avoid or minimize these costs.

One such strategy is to use the provisions of the QDRO, which often allows for the funds to be transferred to the ex-spouse’s retirement account without incurring any early withdrawal penalties. This means, that instead of cashing out, the funds are rolled over into an individual retirement account (IRA) or another qualified retirement plan.

Another strategy your attorney may recommend is accommodating the retirement account’s value into the overall division of assets. For instance, one spouse may retain the entire retirement account, but the other spouse receives a greater share of other marital assets.

It’s imperative to consult with a financial advisor or accountant who specializes in divorce to understand the implications and potential tax consequences. The goal is to ensure the divorce settlement is equitable and fair, without causing unnecessary financial strain or penalties.

Special Considerations in the Division of Retirement Accounts

In Colorado, the division of retirement accounts during divorce involves special considerations, including potential impacts like taxes and early withdrawal penalties when dividing retirement accounts early. Understanding these accounts’ future value can help make informed decisions about your post-divorce financial situation.

Seeking Professional Legal Help

Securing legal representation during a divorce can significantly ease the process. Experienced family attorneys can help you understand the laws and procedures associated with the division of pension and retirement accounts in a Colorado divorce, facilitating a more informed and just resolution.

Call a Family Law Attorney Today

The pension and retirement account division is a complex process requiring extensive Colorado law knowledge. By working with an attorney, you are protecting your rights and securing your financial future.

With our vast experience, a strong reputation, and dedication to each client’s well-being, Petrelli Previtera, LLC is the ideal legal partner for your Colorado divorce. We’re committed to protecting your interests and defending your rights. Contact us to schedule a consultation today.