High-value assets frequently become a focal point during divorce negotiations or litigation. People often focus on the homes where they live. Retirement accounts are often the only asset worth a comparable amount.
The resources people have put aside for their comfort in their golden years can be worth as much as the homes where they live or sometimes even more. Their retirement resources are a crucial form of protection for the time ahead when they plan to live on a fixed income. The following are some of the most contentious aspects of addressing retirement resources in Colorado divorces.
Determining the vulnerable portion of the account
Retirement assets are sometimes partially marital property and partially community property. Spouses may have contributed to them before getting married and during the marriage. Therefore, they may need to go over their financial records carefully to establish how much of the account is actually subject to division. Spouses can typically preserve the separate portion of the account even if they must divide the marital portion.
Avoiding taxes and penalties
Anyone who contributes to tax-deferred retirement accounts like 401(k)s is likely aware of the risk of a penalty for early withdrawals. If people pull from the account before they reach retirement age, they may end up responsible for more income taxes that year. They may also be at risk of a penalty that amounts to 10% of the amount withdrawn ahead of time. Spouses may have to draft specialized documents after the final property division decree if they hope to avoid the taxes and penalties possible for early withdrawals.
Addressing pension benefits
Unlike retirement savings accounts, pensions may not be financial accounts that people can actually divide during divorce proceedings. They can be an employment benefit that people cannot access prior to reaching retirement age. Spouses may need to quantify the value of the pension to offset it with other assets. They could negotiate support arrangements to ensure that the spouse without the pension receives a portion of its value during the distribution.
Understanding what issues may arise when addressing retirement assets during divorce can make it easier to prepare for divorce negotiations. Spouses who know what to expect during divorce are less likely to accept inappropriate terms or to set unachievable goals.
