Timing Problems with IRAs and Divorce

Tuesday, April 21, 2015

By Joe Cicchinelli, IRA Technical Expert

When a married couple gets divorced, IRAs can be divided as a result. So, if you’re in the middle of a divorce, you should know that some or all of your IRA can be awarded to your ex-spouse. The process is similar to how some of your other assets are divvied up, but there are major differences and special rules that apply when you’re dealing with an IRA.

Make sure you speak with an attorney to properly draft the legal documents you’ll need to divide the IRA. A QDRO (qualified domestic relations order) is never used to split an IRA in a divorce.

When the IRA funds (or assets) are properly transferred in a divorce, there won’t be any IRS reporting of the transfer and none of the transaction is taxable to either one of you. The IRA custodian should not issue a Form 1099-R to show the money leaving your IRA nor should they issue a Form 5498 to show the money deposited to your ex-spouse’s IRA.

To divide an IRA in a divorce, the money in the IRA (or assets such as shares of stock) should be directly transferred to the same type of IRA for your ex-spouse. So if you have an IRA, then transfer the funds to an IRA in your ex-spouse’s name; if you have a Roth IRA, transfer the funds to a Roth IRA in your ex’s name. The transaction must be done as a direct transfer; do not take a distribution from your IRA and give it to your ex.

While losing your IRA is a problem in-and-of itself, there are some unique problems that you might encounter along the way. One of the main issues could be the timing of the transfer. For example, if the legal document says that you owe your ex-spouse half of your IRA, it might not say when that valuation should happen. If your IRA is invested in securities that greatly fluctuate in value, the amount that is eventually transferred might be much more (or less) than you or your ex-spouse were expecting. This could lead to problems and even more litigation. So make sure the legal documents address the timing issue to save yourself more headaches.

Receive expert IRA and tax planning articles straight to your email. Subscribe here.

Post Views: 40
Posted in: , , ,

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:

Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC – depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:

Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:

Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.