Dear 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
Dear 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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