Who pays tax on IRA distrib incident to divorce
Who pays tax on IRA distribution resulting from a “failed” direct transfer attempt incident to a divorce.
A divorce decree states “divide husband’s retirement account by rollover with half of the current value distributed to the wife”.
Part of this retirement account was 2,500 shares of Private Placement stock.
The custodian of the husband’s retirement account sent a stock certificate to the custodian of the spouse’s IRA account certifying that ([i]wife’s name [/i]IRA account #xxxx-xxxx) is the owner of 2,500 shares of the private placement stock.
The custodian of the wife’s IRA states that they cannot accept private placement stock, nor the proceeds from the sale of the private placement stock, into her IRA account. (The wife did sell the stock.)
Who pays the tax on this distribution? The husband or the wife?
I’m referring to page 92 of The Retirement Savings Time Bomb and it seems it may be taxable to the husband.
Permalink Submitted by Alan Spross on Mon, 2011-08-22 22:12
If a transfer attempt failed in this manner, the original IRA should accept the shares back and then start over with the wife opening an IRA with a custodian that will accept the shares. There is no indication that a distribution to the wife has been made here.
Once back in the original IRA, if a custodian cannot be found to accept the shares, the decree may have to be amended with a solution to the assets problem so a proper non reportable transfer can be made. There should be no 1099R produced for this transaction.
Permalink Submitted by Mary Jean Wenzel on Tue, 2011-08-23 13:55
Unfortunately, the wife [u]did sell [/u]the 2,500 shares of private placement stock. (She attempted to find a custodian who would accept the stock, but couldn’t meet their requirements.) She has the proceeds from the sale ($17,500) and is spending it. Too late to follow your advice.
At this point my question is who pays the tax? Should she, or her husband? Once again, I’m referring to pg 92 of The Retirement Savings Time Bomb. Probably if she sold the stock and is keeping the proceeds she has to pay the tax. The failed direct transfer, or the fact that she actually received the stock certificate, apparently does not constitute a distribution to the husband.
Permalink Submitted by Alan Spross on Tue, 2011-08-23 19:28
There are some unanswered questions exactly how she got control of the shares if her IRA custodian rejected the transfer. In any event, she obviously did, possibly as a result of additional errors. No doubt these IRA custodians are both going to attempt to divert the responsibility to some other party.
The IRS will be guided by who the 1099R is issued to by the ex’s IRA custodian, assuming the shares were never accepted into her IRA account. When transactions like this go wrong, it can set off a chain reaction of abnormal events due to both IRA custodians and owners acting in unpredictable ways. I would start with the original IRA custodian, who will probably be inclined to issue the 1099R to the husband because the transfer turned into a distribution from his IRA account.
Were any other assets actually transferred into her IRA, or was the stock the only assets included in the aborted transfer? Another factor to consider is that if the total value of the aborted transfer was only the 17,500 in stock, it is probably not enough to support the expense of a letter ruling request. And if she is spending the money, any case that she would have to request the IRS to allow a rollover has lost any chance of approval. And if she is was going to spend the money anyway, she would have just taken a taxable disrtibution from her own IRA, and if under 59.5 the distribution will also be subject to penalty.
Does the book comment on this exact situation? Does not seem likely to expect this exact situation to be anticipated to the extent it would be included in a book.
This is not the usual situation where the husband takes a distribution and turns it over to the ex. The husband would clearly get the 1099R in that case, but in this case the custodian is probably going to have to consult legal counsel to determine what to do. Neither of them probably need any more legal fees, and perhaps she intended to take a taxable distribution anyway. If that is the case, perhaps it is less costly if the 1099R goes to the husband for her to reimburse him for his tax bill?