72(t) and divorce

Submitted by ShipsnGiggles on Tue, 2016-01-12 21:49

T-IRA, getting divorced owner is taking distributions pursuant to 72(t)
A portion of his IRA assets are to be transferred to an IRA on behalf of his x-spouse

Question
Would the transfer being considered a modification?
what is the process to transfer the assets? – ensuring the IRS is aware extra money was distributed due to divorce?

Thanks



Submitted by Alan - IRA critic on Tue, 2016-01-12 23:12

  • It would have been better to avoid the IRA transfer until after the plan ended, because there is uncertainty what the IRS will do in any given situation. First, there is no IRA distribution as a transfer incident to divorce must be done by a non reportable trustee to trustee transfer from the owner’s IRA to an IRA of the receiving spouse.
  • IRS PLRs have been inconsistent, but the most risk free option is for the owner to just continue the calculated 72t distribution as is. The IRS has also ruled favorably when the IRA owner reduces the 72t distribution in proportion to the % of the IRA balance transferred, but would have to make a statement as such with his tax return and hope there is no blow back from the IRS. Another option that has been accepted in the past is for the receiving spouse to continue their share of the distribution so that the total distribution is taken between both spouse’s IRA accounts.
  • While all of these approaches have been approved by the IRS in the past, there have also been conflicting rulings. Since there is no guarantee, it is best for the spouses to arrive at an agreement how they will want to approach the plan and then consistently follow the method selected.
  • Option 1 probably has the least risk because it can be executed without the IRS even knowing that a transfer occurred since the transfer is non reportable. The only way the IRS would know about the transfer is by questioning why the year end balance on Form 5498 dropped so much from the prior year, and that is very unlikely.

 



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