Divorce IRA settlement question
I have a client that recently got divorced and she is receiving some IRA funds from her husband, is there any documentation that she needs and would it be a simple as splitting the IRA between the two and rolling her share in an IRA in her name?
I am aware that there is something called a QUADOR or divorce degree that she will need but I still don’t understand the rolling of the IRA funds, can you please help me to understand this process.
Permalink Submitted by mk foss on Mon, 2011-09-26 21:30
In order to split a qualified plan in a divorce a QDRO is necessary – it’s a court order telling the plan administrator how the split is to be accomplished.
You don’t need a QDRO for an IRA but you still need some paperwork to show that the funds are supposed to come to the individual due to a divorce. Usually it will be a court order or settlement agreement. She should check with the IRA custodian to see what kind of paperwork they require to split the IRA and then bring that information to the custodian. It is easiest if the account can be transferred to a new or existing IRA of the former spouse. When checks are issued it’s more likely that mistakes can be made that would make the entire distribution taxable.
Permalink Submitted by Alan Spross on Mon, 2011-09-26 22:44
I agree. The main issue here is NOT to try to split the account by taking a distribution since that will create a crippling taxable event.
Under the provisions for IRA “transfers incident to divorce” (p 28 of Pub 590), the actual movement of funds must be by direct transfer. A 60 day rollover cannot be done to move the funds to the receiving spouse’s IRA account. This process is best accomplished by having the current IRA custodian set up a new account for the receiving spouse and then transferring funds to it as specified in the decree. If either spouse then wants to move the accounts from that point, they have a choice between another direct transfer or a 60 day rollover.
Any IRA basis from non deductible contributions or rollovers of after tax amounts from employer plans must be dealt with as specified in the decree. If the decree is silent, then the basis should be split in the same portion as the account fair market value is split. An 8606 then needs to be filed by each spouse to document the new basis in each of their IRA accounts.
Permalink Submitted by Bruce Steiner on Tue, 2011-09-27 02:57
Section 408(d)(6) says it has to be “under a divorce or separation instrument described in” Section 71(b)(2)(A).
Section 71(b)(2)(A) says that a “divorce or separation instrument” mean “a decree of divorce or separate maintenance or a written instrument incident to such a decree.”
So that’s what you need. No more, and no less. The lawyers handling the divorce should know this, or should know where to find it, or should know to consult with tax counsel who can appropriately advise them.