A 401(k) plan is one of the most common retirement plans offered by private employers.
When dividing a 401(k) plan during a divorce, it must first be determined whether the account is marital property. Any 401(k) funds accrued throughout the marriage are deemed marital property, and so these will be subject to equitable property division during a divorce.
Like an IRA, a Colorado divorce court may opt to divide a 401(k) between spouses—regardless of which spouse was the employee and which spouse was not.
A 401(k) is only under one spouse’s name, and so a Qualified Domestic Relations Order or QDRO is needed for the other spouse to get his or her share in a divorce. Great care should be taken to complete the QDRO as it needs to comply with both plan requirements and the specific provisions of the Colorado divorce decree. Most plans must follow a specific language under the terms of the plan. The family court then issues these orders, and outlines how such account is to be divided.
Once the Judge signs the QDRO and a certified copy of the signed QDRO is given to the plan provider, the 401(k) account is divided as ordered by the court. Typically, the plan provider creates another account for the recipient spouse, and simply transfers his or her share to that account in the recipient spouse’s name.
The recipient spouse owns his or her interest in the account as soon as the 401(k) is divided. This interest grows separately from the spouse’s share. The original plan holder may continue to invest his or her own portion, while the recipient spouse may need to rollover the 401(k) in a separate plan that permits investments.
While a 401(k) is a tax-deferred retirement account, there are no tax consequences from simply dividing the account in a Colorado divorce based on a court order. Dividing a 401(k) using a QDRO prevents the original plan holder from incurring any tax or penalties, which can amount to up to 40 percent of the withdrawal. The recipient spouse may opt to have his or her share placed in a similar kind of account, or to cash it out.
If both spouses are below 59 and ½ years of age, Colorado law permits the withdrawal of the court-ordered amount without any early withdrawal penalties. This prevents the owner of the account from paying taxes on the amount paid to his or her ex-spouse. The spouse receiving the proceeds will be taxed on the received amount if he or she takes the amount in a lump sum cash amount. Note that if the QDRO was not correctly created, however, then the account holder may need to pay the early withdrawal penalty.
The division of retirement plans in a Colorado divorce can entail some complex paperwork. If you are getting a divorce and either you or your spouse have a 401(k) account, you may benefit from consulting with an experienced attorney on how to go about dividing your funds.