Divorce-Induced IRA Transfer

Submitted by Jay P. on Fri, 2015-09-11 23:00

Hi All –

A husband and wife are divorcing…..wife gets 1/2 of husband’s retirement assets. Consists of an IRA invested in an equity-indexed annuity with husband’s financial planner and a 401(k) at husband’s current employer. Annuity is past surrender period. The ultimate goal of the wife is to transfer her portion of the accounts to an IRA at another institution. They both ive in CT…not a community property state.

Just want to be clear on what is necessary to transfer wife’s 1/2 without tax issues.

My understanding is a QDRO is not required for an IRA transfer…correct? If that is accurate, will a divorce decree suffice if it addresses the entitled asset split between spouses? If it does not address this, what written instrument is needed? Please confirm if a QDRO is needed for the 401(k) transfer?

Is it correct to first…open an IRA in the name of the wife (recipient spouse)at the current firms and transfer her portion to it? Then second….transfer her (temporary)IRA via trustee-to-trustee to her institution of choice?

Regarding the annuity IRA….any idea if the annuity will need to be split in two or…will wife’s portion be transferred as cash to her new IRA?

Am I missing anything else? Thanks in advance for the help.

Jay



Submitted by Alan - IRA critic on Fri, 2015-09-11 23:41

  • A QDRO is required for the 401k transfer, but for the IRA the transfer is called “transfer incident to divorce”. A QDRO does not apply to the IRA, and a specific divorce decree provision will suffice for the IRA transfer. As for the 401k, a QDRO cannot force immediate distribution unless the husband was eligible for distributions. Another thing to consider is that distributions from the 401k directly to the wife will be penalty free under the QDRO penalty exception, but if rolled to an IRA, she will have to wait until 59.5 or start a SEPP to get penalty free distributions.
  • Wife needs to open an IRA in her name to receive the IRA transfer. The 401k transfer if to be done currently subject to the prior considerations, can go into the same IRA or could be rolled into a separate rollover IRA. State IRA creditor protection provisions would be a factor in combining into a single IRA or maintaining separate IRAs. Check with the insurance company to determine options for the annuity IRA transfer.
  • Remember to check if either his IRA OR the 401k contains basis from after tax contributions, if the 401k includes a Roth 401k balance, or if it includes appreciated employer stock shares eligible for NUA.  There are various strategies available depending on the composition of the 401k account.


Submitted by [email protected] on Thu, 2015-09-17 13:52

Alan -Thank you for your response….very helpful.  I understand everything you mentioned.  Just one question relating to the possibility of after-tax contributions in this IRA that is invested in an equity-indexed annuity.  If there are after-tax contributions in this account, what would her course of action be in order to be sure she has a proper accounting of before and after-tax contributions?Thanks again.Jay



Submitted by Alan - IRA critic on Thu, 2015-09-17 17:50

  • Jay, if husband’s TIRA account(s) include basis per Form 8606, the amount of basis transferred to the wife should be in proportion to the % of his total TIRA balance that she receives. This applies even if she will receive the EI annuity IRA while husband retains other TIRA accounts since basis floats over all his TIRAs and is not assigned to any particular account. She would then file her own 8606 with her return for that year to report the basis she receives on line 2 of the 8606
  • If husband has not been filing 8606 forms as required each year a non deductible contribution was made, then he should be required to do so retroactively, and bringing this current with the IRS will benefit both of them. This could require considerable research involving old tax returns and old 5498 forms. Hopefully, if there is basis the latest 8606 would reflect the correct accumulated basis in the account and all she should secure is a copy of the latest 8606 from which she is entitled to her %.


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