If you are getting a divorce, one of the assets that a court can divide between you and your former spouse are retirement accounts/ assets. These assets may be minimal, but, depending on the stage of life and of your career that you are in, they may be significant for purposes of your future financial planning and goals.
There are two main types of retirement assets that may become a topic of discussion in your divorce. One is a defined benefit plan and the other is a defined contribution plan.
A defined contribution plan is a retirement plan that provides an individual retirement account for each participant and the benefits of which are based solely on the amount contributed to the participant’s account. These are usually referred to as 401(k)’s or IRA’s.
When dividing a defined contribution plan, the value of the asset is the amount of money in the account itself. These accounts can be divided between divorcing parties without the need to cash out accounts or to pay taxes and penalties. While not every defined contribution plan requires one, some will require the Court to issue a Qualified Domestic Relations Order (“QDRO”), which directs the account administrator to divide the asset based on the terms agreed upon by the parties or ordered by the Court.
A defined benefit plan that consists of employer contributions. Defined benefit plan employer contributions usually are calculated by a percentage of the participant’s highest average salary, while the value of the asset is based on those contributions, the plan’s benefit formula, and the participant’s age and service credit at the time of retirement. These plans are more commonly referred to as pensions. Pensions can be more complicated to divide than a defined contribution plan, because there are a number of moving pieces that need to be accounted for when valuing the asset. Oftentimes, in order to determine the marital value of a pension, an expert will need to be involved.
Colorado Courts have used different methods to divide pensions during a divorce. These methods include dividing the plan by a fixed monetary amount, a fixed percentage of the payment that the pension holder will receive, a formula based on the net present value or a deferred distribution method in the future, or any other method or formula mutually agreed upon by the parties.
Making sure that the division of your family’s retirement assets is handled correctly during your divorce is crucial. While you were once planning on retiring with your spouse, the retirement assets that are available to both of you will need to be divided, and these assets will be counted on in order to support two households, instead of just one. At GEM Family Law, our seasoned family law attorneys can help you navigate the complexities and implications of dividing these important assets during your divorce.
Authored by: Chelsea Augelli, Associate Attorney