taxes

Moving IRA assets under divorce decree

George SaenzQuestionDear Tax Talk,
I am 48 and looking at withdrawing money from my IRA in preparation for a divorce settlement. What penalties, taxes and fees can I expect?
-- Richard

AnswerDear Richard,
Not only are you getting separated from your spouse, but also your money. An individual retirement account, or IRA, belongs to the spouse that established it. You generally cannot transfer money from one spouse's IRA to the other spouse's account. An exception exists in the case of a divorce.

The transfer of all or part of your interest in a traditional IRA to your spouse or former spouse, under a decree of divorce or separate maintenance or a written instrument incident to the decree, is not considered a taxable transfer. As long as the receiving spouse maintains the funds in the IRA, neither spouse will pay income tax or penalty for early withdrawal.

There are two commonly used methods of transferring IRA assets to a spouse or former spouse. The methods are:

  • Changing the name on the IRA.
  • Making a direct transfer of IRA assets.

If all the IRA assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.

With a direct transfer, you direct the trustee of the traditional IRA to transfer the settlement amount directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse.

Similar nontaxable treatment applies to your interest in employer-sponsored retirement plans transferred incident to divorce.

You would not make the withdrawals prior to the divorce. This would be taxable, and as you're under age 59½ they would be subject to the 10 percent penalty for early withdrawals.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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