Divorcing – doing a partial Transferring of Assets to ex-spouse from my Traditional Rollover IRA that has some After-Tax funds)

Submitted by Rob Layman on Tue, 2018-05-01 22:30

My Rollover (Traditional – not Roth) IRA contains about $110k of After-Tax funds that were rolled over years ago from my ex-employer’s 401-k plan.
The divorce settlement will require me to do a direct transfer of some portion of my account to her.
My Question is: I would prefer to keep all of the After-Tax funds in my account, Is this allowed by the IRS? – or must I do the math on the date of transfer and give her a pro-rata % share of mixed $$ from my account (taxable and tax-free). I can find no guidance from the IRS either way on this.



Submitted by Rob Layman on Tue, 2018-05-01 23:09

I found this on the top of page 29 of IRS PUB 590-A   (under “Transfers Incident to Divorce”)”If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form.”This would seem to imply that there is discretion on how one can elect to divide taxable and non-taxable funds within an IRA upon a transfer / division due to divorce.   (If I elect to keep all of the After-Tax funds in my IRA and do a direct transfer of only Taxable funds to her IRA – then neither of our basises would change. However, If I give her a mixed bag (coffee & cream) of funds then both of our basises would change.Does anyone out there read this inference the same way I do – or differently??

Submitted by Alan - IRA critic on Wed, 2018-05-02 00:35

  • I don’t think that the p 29 wording infers anything about how basis is assigned, either way. The tax code, IRS Regs and IRS Publications do not provide any direct guidance on whether basis can be split using any method other than pro rating basis at the same % as the account balance to be transferred. I do not know of any cases where basis was not pro rated, but even if such 8606 forms were filed pursuant to specific provisions of the divorce decree, given that the IRS ovesight of basis issues is abysmal, it would not be wise to take lack of an IRS challenge as approval. More likely, it would just indicate that the IRS did not realize what was being done.
  • If a 50-50 split of your IRA balance was agreed, the basis would also have to be split or the value transferred to your spouse would be less than 50%, and could cause issues. If you wanted to roll the dice with the IRS and retain all your basis, that should be factored into the gross amount your spouse would receive (greater than 50% to offset not receiving any basis), and both parties should agree. There is a net savings to the higher tax rate spouse to retain the basis, and that should also factor into the calculation, but the complexity and time spent on this approach probably does not warrant the potential issues that could arise such as more legal hours, and possible IRS problems down the road. In short, I would suggest pro rating like everyone else does because that is sure to be simpler and not have potential pitfalls.

Submitted by Rob Layman on Wed, 2018-05-02 03:46

Understood – thankyou – a couple of minor points and another question:  It will not be a 50/50 split of my account – We will simply arrive at an agreed upon $ amount that I will transfer to her new rollover IRA (it will probably be in the neighborhood of about 20-25% of my total IRA acccount balance).  I’m assuming for determining our basises, we would simply calculate my total account balance on the day prior to the transfer and divide my After-Tax amount by the Total Account value to determine the % (basis) that is not taxable.   Then we figure what % of the total account value I am giving her by dividing the total $ amount she is receiving by the total account value prior to transfer.  Let’s say it was 25%.  Her basis would then be 25% of my total basis. and my basis would be the reduced to the remaining 75% of the current basis.   (yes/no?)      Finally – WHEN do we both have to file a 8606 – I’ve looked at Pub 590-A and instructions for 8606, but again, I’m unclear if the transfer due to divorce means we have to file it in the year the divorce occurs, or not until we each start taking distributions. ?

Submitted by David Mertz on Wed, 2018-05-02 11:31

If the intent is to transfer basis in proportion to the overall balance in your IRAs on the day of the transfer, as is commonly done, I would make sure that it is specified in the separation agreement, particularly since your agreement is specifying a transfer of a dollar amount rather than a fractional amount.

Submitted by Rob Layman on Wed, 2018-05-02 18:06

thank you – WHEN do we both have to file a 8606 ?? – I’ve looked at Pub 590-A and instructions for 8606, but  I’m unclear if the transfer due to divorce means we have to file 8606’s in the year the divorce occurs, or do we wait to file them wheneverl we each start taking distribution a few years down the road. ?

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