Divorce IRA split
My clients have just received their divorce decree. Regarding the money in IRA’s it says. (the IRA has annuities in it)
“One-half of the interest in the annuity accounts which shall be divided via a transfer for one half of the interest in the values between the policies in the “husband’s name” and those in “the wife’s name” into an IRA as soon as reasonably possible after execution of this agreement.”
From my earlier readings of IRA splits on this forum it seems that the above is insufficient to avoid a taxable event.
In another part of the decree referencing an equalization payment that is being paid from life insurance surrender proceeds it says “This payment is a transfer of property between spouses incident to a divorce and shall not be taxable or tax deductible to either party.”
That language would have seemed more appropriate for the IRA transfer.
I had repeatedly put in emails that the IRA division equalization transfer needed to be specificed as a transfer incident to divorce in the decree.
Please let me know if what is in the divorce decree regarding the annuities in the IRA in my first paragraph is sufficient or they should have the decree amended.
Thanks
Scott Foster
Permalink Submitted by Alan - IRA critic on Thu, 2023-07-27 02:10
A transfer incident to divorce is completed like any other IRA transfer, except the transfer is allowed to be made to the receiving spouse’s IRA. As long as there is no actual distribution from the IRA, a transfer specified in the divorce decree will be a non reportable transfer of IRA assets to the IRA of the receiving spouse and no taxes will be due. Any IRA basis held in the transferor IRA is also treated as ratably transferred to the IRA of the receiving spouse and that will be reflected in the next 8606 otherwise filed by each spouse. An IRA annuity is handled just like any other IRA.
Permalink Submitted by Craig Smith on Thu, 2023-07-27 22:20
Alan, somewhere I got the idea that an in-marriage QDRO was viable for retirement plans only (specifically other than IRAs). Is that accurate?Or stated another way, would a in-marriage QDRO “work” to transfer IRA assets tax-free between spouses?
Permalink Submitted by David Mertz on Thu, 2023-07-27 23:13
CFR 1.408-4(a)(2) indicates that an assignment of rights of any portion of an IRA other than as a transfer incident to divorce is deemed to be a distribution to the IRA owner. This means that moving funds from an IRA to the (current) spouse’s IRA would be a distribution to the IRA owner and a separate regular contribution by the spouse.
Permalink Submitted by John Foster on Fri, 2023-07-28 00:15
Alan, I did understand that a transfer incident to divorce to the spouse’s IRA is allowed and is not reported. My question is does the divorce decree have to use language that actually says that the IRA split is a “transfer incident to divorce” and shall be non reportable or not taxable to either property or is the present language I referred to “”One-half of the interest in the annuity accounts which shall be divided via a transfer for one half of the interest in the values between the policies in the “husband’s name” and those in “the wife’s name” into an IRA as soon as reasonably possible after execution of this agreement.” sufficient?Thank you,
Permalink Submitted by Alan - IRA critic on Fri, 2023-07-28 01:11
Since a copy of the divorce decree or separation agreement must be submitted to the custodian holding the IRA to be split, that custodian will have to determine if the wording is clear enough for them to process the transfer. It is possible that some of them will require a clear statement referencing “transfer incident to divorce” before processing the request and others will not, therefore this is under the control of the respective IRA custodian. Sec 408(d)(6) just refers to a transfer intent in the document and since this is a divorce decree any transfer request would automatically be incident to divorce. Once they do the transfer, it is not even reported to the IRS. I would expect that a good divorce lawyer would clearly refer to “transfer incident to divorce” but some may not. Again, knowing the risks of a disallowed transfer, each custodian will carefully determine if the decree is clear enough or not. If not, they won’t do the transfer.
Permalink Submitted by Steven Benefield on Wed, 2023-08-09 16:18
Code section 408(d)(6) states that the transfer of an individual’s interest in an IRA (account or annuity) to his spouse or former spouse under a divorce or separation instrument described in code section 121(d)(3)(C)(i) is not a taxable transfer and the interest at the time of the transfer and thereafter is treated as an IRA of the spouse. Code section 121(d)(3)(C)(i) defines “divorce or separation instrument” as “a decree of divorce or separate maintenance or a written instrument incident to such a decree . . . .” Note that Code section 408(d)(6) does not include the definitions of “divorce or separation instrument” in Code sections 121(d)(3)(C)(ii) or (iii). Treas. Reg. § 1.408-4(g)(1) provides that the transfer of an individual’s interest, in whole or in part, in an IRA to his or her former spouse under a valid divorce decree OR a written instrument incident to such divorce shall not be considered to be a distribution from an IRA to the individual or the former spouse. Treas. Reg. § 1.408-4(g)(2) provides that an interest described in § 1.408-4(g) transferred to the former spouse is treated as an IRA of the former spouse if the interest is in an IRA.A divorce decree need not use any particular language as long as it orders the IRA to be split, although it would be good practice to identify the IRA with specificity (custodian, account #, etc.) and direct that “an interest in the IRA” shall be transferred to an IRA for the spouse via custodian-to-custodian transfer. If the division is in a property settlement agreement or other document that is not a part of the divorce decree, the document should clearly state that it is executed pursuant to the divorce decree.