IRA Transfer from Spouse to Spouse in Divorce
I have a client who is in the process of a divorce. Her husband as part of the monetary settlement wants to transfer his IRA to her. Can this be done or not? If so what are the ramifications and pitfalls? Is this a good idea or not?
Permalink Submitted by Alan Spross on Tue, 2007-12-11 23:44
It can be done as part of a divorce or separate maintenance decree, not as a spousal voluntary settlement decision. Whether this is wise or not depends on several financial details and the needs of both parties.
If part of a spouse’s IRA balance is transferred to the other spouse, there is no change in the tax rules regarding distributions. The transfer is tax free, but a 10% early withdrawal penalty still applies to distributions made by either spouse. There is no exception to penalty as there is with a QDRO on an employer plan. That said, there is a particular problem with transferring any IRA account subject to a SEPP plan, as the IRS position is not clear regarding modification of the plan due to a spousal transfer. Therefore, a 72t IRA should not be part of the settlement unless there is no other choice but to face a possible busted SEPP plan.
In this case, if the receiving spouse gets a traditional IRA that is not part of the SEPP plan, they could start their own SEPP in order to tap the IRA without penalty if under age 59.5. In divorce settlements, the after tax value of assets is frequently considered, meaning that a Roth IRA is much more valuable than the same amount of a TIRA, and non retirement assets are valued based partially on their tax basis, ie what cap gain would be due if sold.
Permalink Submitted by Terrence McMullen on Wed, 2007-12-19 16:32
Although the penalty exception does not apply to IRA’s (Code Section 72(t)(3)(A), a traditional IRA distribution is tax free, and therefore automatically exempt from the 10% penalty tax, if it represents the transfer of an individual’s interest in an IRA to his spouse or former spouse under a divorce or separation instrument. (Code Section 72(t)(1); Code Section 408(d)(6)).
Permalink Submitted by Al Fry on Wed, 2007-12-19 20:41
But only if it goes into a IRA owned by the spouse.