Dividing Retirement Assets in a Colorado Divorce
Retirement assets are sometimes the largest class of assets to be divided in a divorce or legal separation. They can also be attached to collect child support and maintenance arrears.
In Colorado, the general rule for the division of property controls. In other words, if the retirement assets are marital property, then generally half of the equity belongs to each spouse
This includes all tax-deferred assets, such as profit-sharing plans, pension plans, 401(k) plans, and IRAs.
Using a QDRO to Avoid The Tax Problem
The general rule of tax law is that all withdrawals or transfers of retirement assets are subject to the 10% early withdrawal penalty (if under age 59 and 1/2), plus the amount withdrawn or transferred is also taxable income
However, all tax can be avoided if the retirement assets (other than IRAs) are split with the use of a Qualified Domestic Relations Order ("QDRO") and the resulting accounts are kept intact.
IRAs do not have to be split with a QDRO because they are not qualified plans.
A QDRO is a state court order, signed by a Judge, which divides retirement assets pursuant to a divorce or legal separation. The QDRO must also be accepted and approved by the retirement plan administrator.
In order to be an approved QDRO, specific federal tax law requirements must be followed and incorporated into the QDRO.
Since the Judge is not going to review the QDRO for accuracy, you should have an attorney prepare it and submit it to the Court. You will have to live with any mistakes made in your QDRO.
A mistake can be costly, because the amounts withdrawn or transferred are subject to tax. Also, the assets are no longer able to continue growing with tax-deferred status. Further, an inaccurate analysis may result in a less than equitable division.
However, not all plans accept and treat QDROs the same way. Make sure you first inquire about your specific plan requirements and restrictions. Colorado PERA plans have restrictions.
The QDRO should be completed and submitted to the Court at the same time that the Decree and Separation Agreement are sent to the Court. In other words, waiting until some time later could result in a total loss if the plan participant dies (or terminates) before the QDRO is accepted by the plan administrator.
Also, make sure that benefits are not lost if the plan participant dies after the QDRO is approved and accepted.
Retirement Plan Valuation
IRAs, 401(k), and some defined contribution plans are easy to value. Generally a review of account statements is enough to determine value as of the date of the Decree.
However, defined benefit pension plans are much different and are difficult to value and split. A defined benefit plan is a retirement plan which provides a monthly income for life. In other words, the plan does not have a current value which can be determined from a monthly or quarterly statement.
The Internal Revenue Code includes tables which can be used to value such a plan. The valuation is complex. Since it is complex and a number of assumptions must be used, the conclusions by different valuation experts vary. Also, plan administrators provide valuations.
Problems with Some Plans
Some retirement plans, particularly some government plans, do not allow for a 50-50 split with a QDRO. The big mistake which is often made with these plan restrictions is that the non-owner Spouse (transferee) accepts whatever the plan will provide. Even if that amount is less that an equitable division (generally 50-50). This mistake can cost the transferee several hundred thousand dollars.
In these circumstances, a less than equitable division should be made up with other assets outside of the plan.
Be careful with plan valuation and an analysis of benefits after the death of the participant.
Colorado PERA Plans
Colorado state employee retirement plans are governed by PERA. PERA has some unique restrictions, including the restriction that all divorce-related divisions of retirement assets must be accomplished within 90 days after the court enters the decree. After the 90 day period expires, PERA will no longer allow the division of assets. The Colorado higher courts have agreed.
See www.QDROPlan.com for more information.
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