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Married couples spend much of their lives together, building and saving assets for a secure life after retirement. When they decide to get a divorce, retirement portfolios can be some of the most lucrative assets that are divided.

While Colorado awards most marital assets through “equitable distribution” – which doesn’t necessarily mean those assets will be split equally – couples must take an extra step for dividing qualified retirement plans, such as pensions and 401(k)s.

QDRO basics

A qualified retirement plan, recognized by the IRS, is where investment income accrues tax-deferred and is withdrawn after the plan’s participant reaches retirement age.

When a divorce happens, a qualified domestic relations order (QDRO) is necessary to designate a portion of these benefits to a non-participant spouse, also known as the alternate payee.

How are retirement plans divided?

The complexity of dividing retirement funds depends upon the type of plan:

  • 401(k): If the account was established during the marriage, it’s likely that the entire balance earned during the marriage is equitably divided. If created before the marriage, the amount earned during the couple’s time together is typically considered a marital asset and distributed accordingly.
  • Pensions: These can be more challenging to determine a non-participant spouse’s share, especially if the participant spouse hasn’t retired. In these cases, working with an experienced family law attorney who understands the complicated laws and tax implications is the best way to receive your fair share.

QDRO benefits

Both participant and non-participant spouses can benefit from a court-approved QDRO. These advantages include:

  • Avoiding early withdrawal penalties: Funds transferred to a spouse under this order, can be rolled over into a tax-deferred IRA and avoid the federal 10% penalty on early withdrawals for those age 59.5 or younger.
  • Both spouses pay taxes: When recipients start receiving benefits, such as after retirement, payments are considered income, and each party is taxed accordingly.
  • Death benefits: A QDRO not only divides these benefits while the participant is alive but can also designate survivor benefits to an ex-spouse if the participant dies.

Protect your future

If you are entitled to receive a share of your spouse’s retirement benefits, inform your attorney as soon as possible. Working with a knowledgeable lawyer is the best way to ensure that you receive your fair share.