Divorce settlement and IRAs
I am a little confused regarding the taxation of a distribution made from an IRA per a divorce settlement. I understand that QDRO’s don’t pertain to money inside an IRA; only money coming from a qualified retirement plan to a former spouse. So who is taxed on the distribution or the money when it comes from an IRA? Is it the IRA owner or is it the former spouse receiving the money per the settlement? I’ve received conflicting answers from two different IRA custodians. Any help would be appreciated.
Permalink Submitted by Alan Spross on Thu, 2012-09-27 21:28
If an IRA is partitioned per divorce settlement, a non reportable transfer is made from one spouse’s IRA to the receiving spouse’s IRA. Distributions taken after that are taxable to the owner of the respective IRAs. A reportable rollover cannot be made from one spouse’s IRA to the receving spouse. The funds MUST either move by direct transfer OR the name on the original IRA must be changed to the receiving spouse.
Sometimes the original IRA owner will take a distribution and give it to the receiving spouse. In that case, it is taxable to the original owner.
Permalink Submitted by Allen Broyles on Fri, 2012-09-28 02:26
The current IRA custodian is saying that it will be a reportable distribution to the receiving spouse per the settlement when the distribution is made. Would you say that is just the policy of the custodian? Do I need to look for another custodian who would process the transfer in the manner you described?
Permalink Submitted by Alan Spross on Fri, 2012-09-28 02:45
The current IRA custodian does not seem to understand that this is done by a direct trustee transfer as additionally reinforced by the name of the process “Transfer Incident to DIvorce”. There is no distribution and the transfer is non reportable per the 1099R Inst p 6, which state – “Do not report such a transfer on Form 1099-R”. There should also be no Form 5498 issued for the receiving IRA because they are receiving a transfer, not a rollover.
Perhaps you should provide the custodian with a copy of the IRS Reg 1.408-4(g) as copied below:
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(g) Transfer incident to divorce—(1) General rule. The transfer of an individual’s interest, in whole or in part, in an individual retirement account, individual retirement annuity, or a retirement bond, to his former spouse under a valid divorce decree or a written instrument incident to such divorce shall not be considered to be a distribution from such an account or annuity to such individual or his former spouse; nor shall it be considered a taxable transfer by such individual to his former spouse notwithstanding any other provision of Subtitle A of the Code.
(2) Spousal account. The interest described in this paragraph (g) which is transferred to the former spouse shall be treated as an individual retirement account of such spouse if the interest is an individual retirement account; an individual retirement annuity of such spouse if such interest is an individual retirement annuity; and a retirement bond of such spouse if such interest is a retirement bond.
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Permalink Submitted by Allen Broyles on Fri, 2012-09-28 04:22
Thank you.
Permalink Submitted by Jose Morales on Mon, 2012-10-01 17:05
Is there a Divorce Decree and/or court order? If yes, what language is used? I’ve seen decrees and court orders that state that “x amount” shall be “distributed” to the spouse, rather than stating “x amount” shall be transferred incident to divorce to spouse. If there is no divorce decress or court order, then as Alan stated, it would be a reportable distribution without question.