Client’s divorce arranged for a trustee-to-trustee transfer of ex-spouse’s Roth IRA. I understand that QDRO rules do not apply to IRAs. Is the solution for her to close-out the Roth and pay tax on the earnings? The transfer was in 2019 so there were earnings in 2019, 2020 and now, 2021 so I presume that there is a 6% excise tax that can maybe be waived if a proper explanation is provided to the IRS. Comments? Anything I’m missing?
QDROs do not apply to IRAs, but there is a similar “transfer incident to divorce” for IRAs. Such transfers are not reportable on a 1099R and are not taxable events. Client simply received some percentage of ex’s Roth IRA balance and therefore owns a Roth IRA, and should be happy that there have been earnings generated since the transfer.
Unless client desperately needs funds, client should generally treat the Roth IRA as the last source to tap because it generates tax free earnings and there are no RMDs. Regardless, the client needs to determine the amount of Roth IRA basis acquired from the ex and integrate that into their already present Roth if they already owned one. This will require some details from the ex which may be very difficult to acquire and even the ex may not have correctly tracked their IRA basis.
Did client already have a Roth IRA? Does client know the year the ex first contributed to a Roth IRA?
Permalink Submitted by David Mertz on Tue, 2021-03-30 20:13
None of the information provided suggests that there is any excess Roth IRA contribution. IRAs are properly transferred incident to divorce by trustee-to-trustee transfer (not a QDRO), which appears to be what happened.