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



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 Since regular contributions and conversions held over 5 years can be withdrawn without tax or penalty, funds could be available without any tax consequences.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.



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.



Add new comment

Log in or register to post comments