Individual Retirement Accounts in Dissolution of Marriage Frequently Asked Questions

Are you involved in a Colorado divorce or family law proceeding involving divorce or dissolution of marriage involving retirement account division? An experienced Colorado Springs divorce attorney can guide you through the legal process and assist you in exploring your options. You have one bite at the apple in the court system so make it count.

Individual Retirement Accounts (IRAs) are among the most common and most frequently misunderstood retirement assets in dissolution cases with regards to how they may be transferred incident to dissolution of marriage.

The value of an IRA at the time of marriage is separate property. Any increase in value during the marriage is marital property and subject to division. To determine what portion of an IRA is marital property:

• Identify the premarital value: The balance on the date of marriage, or the date the IRA was acquired if acquired during marriage by gift or inheritance.
• Identify the current value: The balance at the time of the parties’ entry into a separation agreement or a permanent orders hearing.
• Calculate marital appreciation: The current value minus premarital value equals marital property subject to division. This is considered to be mixed property.

If a spouse claims that part of an IRA is separate property, he or she bears the burden of tracing those funds to their separate origin. Spouses may also agree to exclude retirement accounts from the marital estate. Courts often divide the marital appreciation 50/50 unless circumstances warrant a different split. However, a consideration of all relevant factors is required rather than a mechanical equal division.

IRAs are not subject to the Qualified Domestic Relations Order (QDRO) process. 29 USCS § 1056. Instead, they are transferred via the divorce or separation decree. 26 USCS § 408. There is a tax-free transfer of all or part of an IRA from one spouse to the other incident to divorce.

1. To effectuate a tax-free transfer, the decree or separation agreement must clearly direct the transfer. Next, the parties must execute a "transfer incident to divorce" form. Most IRA custodians have a standard form for this purpose. The funds should move directly from the owner's IRA to the receiving spouse's IRA. The receiving party should not withdraw the funds and then redeposit them—that creates taxable income and potential early-withdrawal penalties. The custodian will require:
   1. A certified copy of the decree or separation agreement; and
   2. A completed transfer form signed by the IRA owner; and
   3. Instructions for whether the receiving spouse wants the funds transferred to an existing IRA or a new IRA established in their name.
2. The transfer is tax-free if done correctly. A transfer pursuant to a divorce or separation instrument is not a taxable event to either spouse if completed as a direct transfer. A rollover has a 60-day time limit and is subject to a once-per-year rollover rule. A transfer incident to divorce under Section 408(d)(6) is not subject to those limits—but it must be documented as pursuant to the divorce decree. 26 USCS § 408. The transfer to the alternate spouse is penalty-free. However, if the receiving spouse later withdraws funds before age 59½, they will owe the 10% early-withdrawal penalty plus ordinary income tax on the distributions.

Not all retirement dollars are equal. A dollar in a traditional IRA is worth less than a dollar in a Roth IRA because traditional IRA distributions are taxed as ordinary income while qualified Roth distributions are tax-free. If you are dividing a traditional IRA and a Roth IRA, consider whether an adjustment is warranted to account for the difference in after-tax value, or if there can be a relatively equal distribution of both traditional and Roth accounts between the parties.

Turning Change Into Opportunity in Colorado Springs Divorce and Child Custody

A highly knowledgeable and experienced Colorado Springs divorce attorney can guide you through Colorado Springs divorce and child custody matters by negotiating, mediating and litigating on your behalf. You can focus on moving to a better future instead of spending your time attempting to navigate complex legal rules and procedures.

Sabra Janko from Janko Family Law has more than 20 years of legal experience and has written “the book” on Colorado divorce and family law – “Colorado Family Law With Forms”, published by LexisNexis, which you can find at https://store.lexisnexis.com/products/colorado-family-law-with-forms-skuSKU02903. Contact us at 719-344-5523 or complete our online scheduling request for a free 30-minute informational consultation. We also offer paid advice sessions for a more in-depth analysis of your case.