One of the most common methods of saving for retirements, IRAs also have penalties for early withdrawal. However, in a Colroado divorce or legal separation, a division of property is simply awarding a spouse his/her property interest, even though the account may be in the other spouse's name. That means that transferring the IRA between spouses pursuant to a divorce court order is NOT a taxable event.
Regardless of whether an IRA is a Roth IRA or a Traditional IRA, the method of division is the same. To allocate a portion of an IRA to the spouse who is not named on the account, the Colorado divorce court order should specify either the dollar amount owing to that spouse, or the percentage of the IRA owing to that spouse. The advantage (or disadvantage) of using a percentage is that the spouse will share in any increases or suffer any decrease in value if the value of the IRA has changed between the date of the decree of dissolution of marriage and the actual division of the account.
Example: At dissolution, the IRA is worth $10,000, and each spouse is awarded 50%. The lawyer forgets to advise the clients how to divide the retirement (neither client used Black & Graham!), so several months later when the IRA is finally divided, it has appreciated in value to $15,000. Each spouse now gets $7500, rather than $5000. Of course, the same is true in reverse, should the IRA decrease in value.
Typically, fund management companies will require a copy of the court order allocating some or all of an IRA to the other spouse, along with their own form, usually signed with a medallion signature guarantee (not simply a notary - think of it as a "super notary"), which formally transfers the IRA.
