Dividing an IRA in a Colorado Divorce

IRAs are one of the most common retirement assets divided in a Colorado divorce — and one of the easiest to handle incorrectly. A single procedural mistake can turn a tax-free transfer into a taxable distribution with a 10% penalty on top.

IRAs Do Not Use QDROs

This is the most important distinction. Employer-sponsored plans like 401(k)s and 403(b)s require a Qualified Domestic Relations Order (QDRO) for division. IRAs do not. They are exempt from ERISA's anti-alienation provisions, so the QDRO process does not apply.

Instead, IRAs are divided through a "Transfer Incident to Divorce" under Internal Revenue Code § 408(d)(6). The transfer must meet two conditions to be tax-free:

1. The division must be explicitly stated in the divorce decree or separation agreement (JDF 1115 in Colorado)
2. The funds must move directly from one IRA custodian to another via a trustee-to-trustee transfer

That second condition is where people make the costly mistake. The IRA owner cannot withdraw the funds, deposit them into their personal bank account, and then write a check to the ex-spouse. The IRS treats that as a standard distribution to the original owner — ordinary income tax applies immediately, plus a 10% early-withdrawal penalty if the owner is under 59½. The fact that the money was ultimately given to an ex-spouse does not matter. A 60-day rollover generally does not fix this.

How the Transfer Works

1. Your separation agreement specifies the dollar amount or percentage to be transferred
2. The receiving spouse opens an IRA in their own name at the custodian of their choice (Fidelity, Schwab, Vanguard — it does not have to be the same custodian)
3. The transferring spouse's custodian processes a direct trustee-to-trustee transfer using the separation agreement or decree as the authorizing document
4. No tax is withheld, no 1099-R is issued for the transfer amount, and no penalty applies

The transfer preserves the tax character of the account. A traditional IRA transfers as a traditional IRA. A Roth IRA transfers as a Roth IRA. The receiving spouse inherits the original cost basis and contribution history.

Traditional IRA vs. Roth IRA

When negotiating the property division, remember that a traditional IRA and a Roth IRA with the same balance are not worth the same amount.

Traditional IRA: Contributions were tax-deductible. Withdrawals in retirement are taxed as ordinary income. A $100,000 traditional IRA is worth roughly $75,000 to $85,000 after taxes, depending on the owner's retirement tax bracket.

Roth IRA: Contributions were made with after-tax dollars. Qualified withdrawals in retirement are completely tax-free. A $100,000 Roth IRA is worth $100,000 after taxes.

If your spouse offers to keep the $100,000 Roth and give you the $100,000 traditional IRA, that is not an equal trade. You are receiving less after-tax value. The property-division balancing tool in our guide adjusts for this difference.

Dividing Annuities

Annuities — whether fixed, variable, or indexed — follow a process similar to IRAs but with additional complications.

Qualified annuities (held inside an IRA or employer plan) follow the same rules as the underlying account type. An annuity inside a traditional IRA transfers under IRC § 408(d)(6) just like any other IRA asset.

Non-qualified annuities (purchased with after-tax dollars outside of a retirement plan) are transferred under IRC § 1041, which governs interspousal property transfers incident to divorce. The transfer itself is tax-free if completed within one year of the divorce or required by the decree within six years.

The catch with non-qualified annuities is the embedded gain. The receiving spouse takes the original owner's cost basis, meaning they inherit the tax liability on any growth. If the annuity has a $50,000 basis and a $90,000 current value, the receiving spouse will owe ordinary income tax on $40,000 when they eventually withdraw.

Surrender charges are another factor. If the annuity is still within its surrender period, liquidating it early to divide the proceeds may cost 5% to 10% of the account value. Check the contract terms before deciding whether to split the annuity or offset it against other assets.

Valuation Date and Market Fluctuations

Colorado values assets as of the date the decree is entered, or the date of the final hearing on disposition of property if that hearing precedes the decree. For IRAs and annuities, request updated statements close to the final hearing. If the separation agreement specifies a dollar amount rather than a percentage, and the market moves significantly between drafting the agreement and entry of the decree, one spouse may receive more or less than intended.

Specifying a percentage ("50% of the balance as of the date of transfer") avoids this problem and is generally the safer approach.

Key Mistakes to Avoid

• Personal withdrawal: Never withdraw IRA funds and hand them over. Always use a trustee-to-trustee transfer.
• Ignoring tax character: Do not treat traditional and Roth accounts as equal in value.
• Missing the decree language: The separation agreement must explicitly authorize the transfer. Without it, the custodian will not process the request.
• Forgetting beneficiary designations: After the transfer, both spouses should review and update their IRA beneficiary designations. Colorado law generally revokes a revocable designation in favor of a former spouse at divorce unless a governing instrument, court order, or contract provides otherwise.

Our Colorado Divorce Financial Split Guide walks through each retirement account type — 401(k), IRA, PERA, and annuity — with step-by-step checklists and a retirement-division tracking worksheet.

See more Colorado guides →