Divorce – Early Distribution
Has anyone heard of an exception due to divorce on the 10% penalty with a non-qualified withdrawal from a Roth IRA?
Thanks for your thoughts.
Kirk
Has anyone heard of an exception due to divorce on the 10% penalty with a non-qualified withdrawal from a Roth IRA?
Thanks for your thoughts.
Kirk
Permalink Submitted by Alan Spross on Tue, 2010-07-20 17:39
Kirk,
Unfortuneately, there is no IRA exception for divorce distributions, despite the fact that there IS an exception for distributions from qualified plans when a QDRO has been executed.
If a divorce decree calls for a Roth IRA to be split, each party receives their pro rata share of regular and conversion contributions. Since regular contributions and conversions held over 5 years can be withdrawn without tax or penalty, funds could be available without any tax consequences. But if earnings or conversions held under 5 years are distributed there is ordinary tax on the earnings and a 10% penalty on the conversions and the earnings.
Permalink Submitted by Jose Morales on Tue, 2010-07-20 18:05
This is a circumstance in which the judge really needs to understand the effect of his/her ruling and how it is worded. They need to clearly state whether funds will be moved to the spouse’s IRA via a non-reportable IRA to IRA transfer or as a distribution, which the spouse may then rollover to their own IRA (and who the tax reporting for the distribution will go to). If the two parties come to a mutual agreement to split the retirement funds without a court order then it must be taken out as a distribution. This is most likely a situation where keeping the courts out of the process is not a good idea, and the need to make sure they understand how the funds should be split for the best interest of both parties is important.