Determining the tax-free distribution from a Roth IRA that was established from a QDRO
A client holds a Roth IRA. The client divorced his wife. In the settlement the husband was required to share approximately (for this discussion) $40,000 from his Roth IRA. For his ex-wife, a Roth IRA brokerage account was established to receive the required transfer.
With the wife’s $40,000 Roth IRA, would distributions be considered cost basis withdrawals? Or, of the transferred Roth IRA, would a calculation defining the percentage of contributions and gains be required to then determine the taxable nature of the withdrawal?
The ex-wife wishes to withdraw $20,000. The goal is to know the tax implications before taking a distribution.
Permalink Submitted by Alan - IRA critic on Tue, 2023-10-03 20:04
The % the 40k represents of the total Roth value on the day of the transfer is the % of basis transferred to the receiving spouse. The ex wife will have to determine the amount of regular Roth and conversion contributions made by the husband in order to calculate the tax impact of her distribution, which must be reported on Form 8606. The 5 year holding period year transfers to the ex wife as well.
Permalink Submitted by William Burt on Tue, 2023-10-03 22:29
Thank you! Your expanation makes sense. In your final sentence, The 5 year holding period year transfers to the ex wife as well, I assume refers to the husband’s 5 year holding period? Or, are you saying that her transferred amount enteres a new 5 year holding period? His 5 year holding period was completed many years ago (19).
Permalink Submitted by Alan - IRA critic on Tue, 2023-10-03 22:45
She uses the same holding period as his, but she must also be 59.5 before her Roth is qualified.
Permalink Submitted by William Burt on Fri, 2023-10-06 16:12
Thank you, Alan!