Taxation of Divorce IRA

Submitted by Mark T Ealy, CFP, CPA on Mon, 2016-01-04 15:25

Husband is required to pay out of his IRA as a result of divorce settlement. Wife can roll over/transfer, but if she takes some in cash, she has to pay income tax. Does she have to pay 10% IRS penalty if she is under 59 1/2, and takes the payout directly from the husband’s IRA? From an employer plan, she does not have to pay the 10% penalty, but what if coming directly from his IRA?



Submitted by Alan - IRA critic on Mon, 2016-01-04 19:23

  • A QDRO does not apply to IRAs. If there is a “transfer incident to divorce”, the appropriate portion of the husband’s IRA balance should be directly transferred (not distributed) to an IRA account of the wife. This is not a taxable event. But if the husband withdraws money from his IRA and pays it to the wife, he will be taxed and subject to penalty on the distribution and the wife will not be able to roll it over to her own IRA.
  • Accordingly, if this is done correctly, the wife’s IRA will receive a direct transfer from husband’s IRA. Then if she withdraws from her IRA, the distribution will be subject to tax and penalty unless she qualifies for one of the penalty exceptions. There is no divorce penalty exception for IRA withdrawals.

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