Divorce and 72t
Client has had an existing 72t on his IRA. He broke the 72t this year by having to take additional withdrawals. Now account will need to split in divorce.
Can the ex spouse take her transfer tax free or does the 72t cause her to have to pay tax on the distribution?
Don C.
Permalink Submitted by Alan - IRA critic on Thu, 2014-12-04 17:40
The IRS has been inconsistent regarding 72t plans and divorce settlements. However, in this case the plan has apparently been busted prior to the divorce settlement and client will have to pay retroactive penalty and interest on the penalty free distributions previously taken from the IRA. But the IRA remainder can still be split under “transfer incident to divorce” rules with a non reportable and non taxable transfer to the ex spouse. The divorce document must be provided to the IRA custodian. If the ex spouse needs funds prior to 59.5, she will have to consider starting her own new 72t plan, and the same goes for the client if he needs penalty free distributions prior to 59.5. Client would report the busted plan on this year’s tax return using Form 5329.