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Dividing up your IRAs in a divorce

In the unfortunate event that a marriage ends in divorce, it may be useful to understand the consequences on the spouses' IRAs.

Divorce, taxes, and IRAs

When a marriage ends, you'll find yourself asking many questions: What happens to assets like IRAs? When transferring or splitting funds in an IRA, am I responsible for any taxes?
Here's the law: Section 408(d)(6) of the Internal Revenue Code says that the transfer of an individual's interest in an IRA to a spouse or former spouse is not a 'taxable transfer.'
Essentially, the spouse who gives up the assets is not responsible for any tax or penalty of future distributions that occur. But the spouse who receives the assets — when it becomes their own IRA — will be responsible for any taxes and penalties from future distributions.
What is required to make this tax-free transfer?  According to the IRS, as defined in IRC Section71(a)(2):
  • a decree of divorce;
  • a decree of "separate maintenance"; or
  • a written instrument incident to such decree, or a document.
A "judgment of dissolution" would be a decree of divorce. An order dividing the IRA could be entered as part of such a judgment, or at any time after the judgment is entered.

Transferring an IRA

If you need to transfer an IRA, the process is fairly simple. It can be accomplished in one of two ways:
  • By transferring a fixed dollar amount or percentage of the owner's IRA to the spouse's IRA.
  • By setting up a new IRA for the amount to be transferred.
Note: If funds are cashed out/distributed and then paid to the spouse/ex-spouse, this is considered a 'taxable event' to the owner of the original IRA. It is important that the movement of funds is done as a 'transfer' and not a 'distribution'.
Securities can be liquidated or transferred and expenses may be shared or paid by one of the parties. It's advisable that the court order spells out the terms of the transfer to avoid unnecessary delays or the need for further negotiation.
As you can see, the specifics of splitting or transfer an IRA can be tricky. Before taking any action, be sure to consult with an accountant and/or an attorney in regards to the specifics of your situation.
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