Pension & Retirement Division
Individual Retirement Accounts (IRAs)
One of the most common methods of saving for retirements, IRAs also have penalties for early withdrawal. However, in a divorce, an IRA can be allocated between the spouses without regard for whose name it is in, and without incurring a penalty.
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.
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), which formally transfers the IRA.
401(k) Retirement Plans
401(k) plans are the most common retirement plans offered by private employers, having surpassed the traditional defined benefit plans long ago. Just like with an IRA, a Colorado divorce court can divide a 401(k) between the spouses, again without regard for which spouse was the employee and which was not. And it is also not a taxable event, nor one for which an early withdrawal penalty applies.
Unlike an IRA, however, the division of a 401(k) requires a separate court order, called a Qualified Domestic Relations Order, or QDRO. Samples are usually available from the plan administrator upon request, however great care should be taken when completing them - you not only have to comply with the plan requirements, but also with the specific provisions of the Colorado divorce decree.
Once divided, the non-employee spouse owns his/her interest in the 401(k), which then grows separately from the employee's portion. However, while the employee spouse can continue investing in his/her portion, the non-employee spouse former spouse may have to rollover the 401(k) into a different plan which allows investments.
Defined Benefit Plans (PERA, FERS, etc)
Unlike 401(k)s or IRAs, where a person owns a fund with a readily ascertainable value, with a defined benefit plan an employer pledges to pay a specific amount upon retirement, depending upon the age of the employee, years of service, salary while working there, etc. Once defined benefit plans were the most common retirement plans around, now they are most often seen with public employees or large corporate employers.
A Colorado divorce court can divide a defined benefit plan, and allocate benefits to the non-employee spouse. The degree of complication to effect the division depends upon the employer. Federal civil service retirement plans, such as CSRS or FERS, require a lengthy Order Acceptable for Processing. PERA, the Colorado Public Employees' Retirement Association, has fill-in-the-blank forms, but routine reject forms which have even the slightest of mistakes.
When a defined benefit plan is divided, the non-employee spouse will receive his/her portion of the retirement benefits only when the employee-spouse receives his/her benefits.
Social Security Benefits
Federal law (42 U.S. Code §407(a)) prohibits states from dividing Social Security benefits. In In re: the Marriage of Morehouse, the Colorado Court of Appeals ruled that Social Security benefits are not marital property which can be divided. The divorce court had put a value on the husband's right to receive social security, and awarded the wife extra marital property to compensate her for the value of the husband's anticipated social security benefits. Awarding a spouse the exact present value of social security benefits constituted an improper offset of the social security benefits, which was tantamount to dividing the social security itself.
The court did not prohibit Colorado divorce courts from considering the right to receive social security benefits entirely. On the contrary, the potential that one spouse may have a financially secure retirement is a "relevant economic circumstance" a trial court may consider when trying to fashion an equitable division of property, similar to one spouse receiving an inheritance or having a greater earning capacity. This means that while a dollar-for-dollar offset is impermissible, Social Security benefits are not entirely invisible to a Colorado divorce court.
A spouse who is not otherwise entitled to Social Security can receive social security benefits on his/her former spouse's record as long as the claimant spouse was married to that spouse for at least 10 years, is at least 62, and is unremarried (a remarriage terminated by death, divorce or annulment generally restores that spouse's entitlement).
More Information
Federal Civil Service Retirement Benefits, from the Office of Personnel Management.
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