What Happens to Your IRA When the State of YOUR Union Changes?

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

President Barack Obama delivered his State of the Union address to the American people last night. With that in mind, we want to take a look at some of the questions that arise when the State of your Union changes. What changes are there to your IRA when you get married? What would happen to your IRA if you got divorced? We explore these questions and more in a short Q-and-A below. If you have additional questions on this issue, feel free to write us at [email protected] and you might see your question answered in our weekly mailbag column.

Q: Do I have to name my spouse as the beneficiary of my IRA?
A: No. You may name anyone you want as a beneficiary of your IRA. However, there are some states that follow what are known as community property rules. In these states, in the event of a death or divorce, your spouse is generally entitled to half of the assets earned during your marriage, including IRAs, whether or not they are named as your beneficiary.

Q: What happens to my IRA when I get divorced?
A: There’s no clear answer to this question, as each case is different. In some cases, the IRA may not be affected at all, while in other cases your divorce agreement might call for your ex-spouse to receive a portion of your IRA. If such is the case, a valid divorce decree or your separation agreement should be given to your IRA custodian, who can then transfer the specified portion to your spouse. This way, you won’t be required to pay tax on any of those funds. You should not take a distribution of your IRA and simply give it to your ex-spouse. Your ex-spouse would receive cash – not a retirement account, but you would be responsible for the tax bill.

Q: Can I keep my ex-spouse as the beneficiary of my IRA after I get divorced?
A: Yes. As stated above, you may name anyone you wish as the beneficiary of your IRA.

Q: Will getting married affect my ability to contribute to my IRA?
A: No. Whether or not you are single or married makes no difference on whether or not you can contribute to an IRA or Roth IRA, provided of course, you continue to have “compensation” and are not yet 70 ½ (for IRA contributions) and meet the income limits (for Roth contributions).

Q: Will getting married affect my ability to deduct an IRA contribution?
A: Possibly. In general, if you are eligible to make a contribution to an IRA you can take a deduction for that contribution. However, if either you or your spouse are covered by a company plan, your ability to take a deduction for an IRA contribution is phased out as your income exceeds certain limits. Click here to see a chart of these limits. So, let’s say you made $150,000 last year, but you were not covered by a company plan. You could take a deduction for an IRA contribution you make on your 2012 tax return. Now, however, in 2013 you marry someone who makes $100,000 per year and actively participates in a 401(k) plan. Even though your personal income has changed and you still are not covered by a company plan, you would now be completely phased out from deducting your IRA contribution. You could, of course, continue to make non-deductible IRA contributions.

Q: Can I combine my IRA with my spouse’s IRA after we get married?
A: Generally, the answer to this question is no. During life, IRAs cannot be transferred between individuals, including spouses. If you were to try and move your IRA into your spouse’s IRA, the amount taken out of your own IRA would be a taxable distribution to you and could result in a 6% penalty for excess contributions to your spouse’s IRA, unless the transfer is due to a divorce as described above.

There is, however, one other time when you can transfer your spouse’s IRA into your own IRA, and that’s after the death of your spouse, assuming you are named as their beneficiary. This is the ONLY time you can move a spouse’s IRA, or anyone’s IRA for that matter, into your own.

Q: What if I marry someone of the same sex?
A: Currently, the federal tax code only recognizes marriages between a man and a woman, even if you were legally married in a state that recognizes same-sex marriages. As such, same-sex couples cannot file a joint federal income tax return, will follow the rules for single taxpayers during life and must follow the rules for non-spouse beneficiaries after the death of one of the spouses.