What will happen to my 401(k) in a divorce?
Other than one’s house, a resident of the Denver area may have most of her wealth wrapped up in a 401(k) or other type of retirement plan.
These are very popular benefits which employers in the private sector frequently offer to their employees.These plans help Coloradans save on taxes while also building up savings for when they can no longer work.
A divorce or legal separation can throw a person’s retirement assets into chaos if he is not careful.
Like any other asset, retirement plans are subject to Colorado’s property division laws. This means that if the retirement plan is legally marital property, a judge has to divide it up fairly.
Retirement plans can present some complications in this respect. For example, if one of the spouses acquired some of the funds in her 401(k) before the marriage and some during the marriage, it could mean that she gets to keep some of the funds outright but has to divide the rest of them.
Also, there can be a question of what is and is not a fair division of the 401(k). This is particularly true when the 401(k) is subject to vesting rules, tax consequences, or other special rules that might make it, in practice, worth less than its value on paper.
Finally, even if a couple can negotiate a retirement plan, there’s also the question of how actually to split the fund. Sometimes, it might make more sense for a person to trade off other property, or agree to take on some additional debt, in order to keep his 401(k) plan.
In other situations, though, the parties may have to ask the judge to sign a qualified domestic relations order, or QDRO, so the other spouse can withdraw her agreed share of the funds. QDROs are complicated legal orders which the couple will have to use if they wish to withdraw retirement funds without facing tax penalties.