Delayed division of IRA in Divorce decree

Submitted by Theresa Torrance on Wed, 2022-10-26 15:54

This question is a bit complicated. I am going through a divorce and will be staying in our family home. We have agreed to equally divide all assets, including a few IRAs (I have a beneficiary IRA and my husband has a SEP ). I will have right of first refusal to buy my husband out of the house when our daughter goes to college in 5 years. My question is, can we include in the Judgment Stipulation that I can use some of my IRA (his SEP) as part or all of my buyout as I most likely will not have the cash? So for example, we divide the IRAS upon divorce (they are not of equal value and are invested differently, which is why we agreed to split them as opposed to just each taking our own IRAs upon divorce), and then in 5 years, if I want to buy him out, I can simply transfer some of my share of his SEP IRA back to him? So what we are looking to do is to just transfer back from me to him -it would not be me withdrawing funds from my share of the IRA, and then buying him out with the cash. I would imagine this should not be an issue with the IRA if it’s in the Judgment and he will be paying the taxes when he withdraws from the IRA.



Submitted by Alan - IRA critic on Wed, 2022-10-26 19:54

  • It’s not clear if such an arrangement is even allowed in your state, and even if it is, the exposure to unanticipated consequences is large with these deferred complications. Who knows what this home will be worth in 5 years? And if you transfer pre tax assets such as an IRA that is subject to tax and penalty upon distribution, the amount of the IRA balance would have to be grossed up. For example, in 5 years if your husband pays a combined federal and state tax rate including the penalty of 40%, you would need to transfer an IRA balance of 167k to produce the equivalent of 100k cash. 
  • Even if your attorney could draft such an instrument, it is very likely that no IRA custodian would agree to transfer an IRA balance based on such provisions. IRA custodians hate uncertainty and the risk of becoming involved with the IRS or in litigation between parties. 
  • FYI – he is getting half of your inherited IRA, but the IRS has not issued any Regs addressing his beneficiary RMDs. Most likely, he would have to continue your RMD schedule each year, and there would be issues if your beneficiary RMDs have not been properly calculated and distributed.
  • Legal and tax issues can be very costly. I would recommend that if you want to buy him out of his interest in the house (and you may not even want to at the time), that you plan on taking out a loan at that time. Interest rates will probably have peaked before then and declined.

Submitted by David Mertz on Wed, 2022-10-26 21:34

Even if it was permissible, which seems unlikely, given the uncertainty about what the after-tax value of the traditional IRA would be to the ex-spouse, I would not expect the ex-spouse to agree to such an arrangement.  It’s unlikely that there is any equitable way to exchange tax-deferred assets for after-tax assets, 

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