Your retirement funds, like everything else you and your spouse accumulated during your marriage, are indeed considered marital property and will be divided in the most equitable manner that the Court can find when you get divorced.

Understand that there are two important aspects of retirement accounts that will be considered: first, anything in the accounts that you or your spouse had before marriage is considered separate property. Say you had $150,000 in your retirement account before the marriage. That $150,000 is all yours. If, by the time you get divorced, that $150,000 has grown to $500,000, the difference will be considered marital property because it was accumulated while you were married. This would include both appreciation and additional contributions. [These comments assume that you haven’t entered into a marital agreement/pre-nup.]

Additionally, unlike other assets accumulated during a marriage, retirement funds don’t have the same instantaneous spend-ability that others have. It’s the only pre-tax asset, whereas virtually everything else you own is post-tax. So, this unique tax status may be taken into consideration during the divorce discussions, as well. More on this later.

There are a couple different ways of approaching how exactly retirement funds are divided. In this blog post, we’ll look at how the Court views and makes decisions about retirement funds in divorce.

Calculating Offsets in Divorce

The purpose of determining offsets is to ensure that the division of assets and debts is done fairly. Let’s go back to the earlier example, where your retirement fund was at $150,000 when you got married, and now it has grown to $500,000.

Here’s how offsets might work in this scenario:

Your attorney creates a spreadsheet listing all of your assets.
In the first column, we identify the retirement account.
The next column says “separate property.” Here, we write in the $150,000 that belongs to you.
In the next column, labeled “marital property,” we write in the remainder, which in this case, is $350,000.
Next, there is a column with your name and a column with your spouse’s name, and now we have a few options:

We can put the whole $350,000 into your account, knowing that your spouse will get something else of equal value — maybe a bank account, an expensive car or piece of art, the summer cabin, etc.
The other option is for your spouse to receive the full $350,000 and you get some other offset of equal value.
The $350,000 could be divided 60/40, 30/70, or some other way with offsets ultimately creating an equal division.
Finally, the $350,000 could be divided equally between the two of you if that makes the most sense.

When we’re all done, we should have about an identified split of assets (minus the $150,000, which is yours alone). As I’ve mentioned many times, Colorado is not a community property state, so there isn’t a requirement that assets be divided 50/50. They are divided “fairly and equitably”. The columns should reflect that “fair and equitable” division.

In some cases, we discount the retirement accounts because many are pre-tax. This means that when the account is distributed, you or your spouse will have to pay taxes on it. The discount is meant to account for that extra tax to make things as fair as possible (imagine if you received a taxable account and your spouse received a post-tax bank account or stocks and didn’t have to pay the same taxes you’ll have to pay. That wouldn’t seem fair!)

I recently worked on a case where the retirement accounts were discounted by 25%. The parties agreed this was “fair and equitable”.

One more thing to note: there are no penalties with the IRS when you transfer retirement funds in a divorce. Typically, the IRS takes a huge penalty if you distribute retirement funds before a certain age, but in a divorce situation, it’s not an issue.

Common Arguments Over Retirement Funds in Divorce

When it comes to the division of retirement funds, I frequently see arguments that go something like this:

“I worked hard and earned all of this retirement money while she/he sat on the couch eating chocolate bon bons and watching Ellen on TV! She/he shouldn’t share in my retirement because she didn’t work!”

The Courts will very rarely re-write the marriage. By that I mean, if she/he sat on the couch all day and didn’t contribute to the household financially, you should have done something about it during the marriage. Maybe if you had, she/he would have gotten a job. But the Court will not penalize him/her for sitting on the couch. In their eyes, your spouse is entitled to just an equitable of the marital property as you are.

There is No Question About Retirement Funds

Finally, remember that there really is no question about whether retirement funds are fair game in a divorce: they are. Really the only questions arise when it’s time to look at how to divide them up.

If you are preparing for a divorce, call our office at 303-449-1873 for a complimentary consultation.