When Splitting IRA Money in a Divorce, Be Careful – Don’t Use a QDRO

By Joe Cicchinelli, IRA Technical Expert
Follow on Twitter: @JoeCiccEdSlott

There’s a lot of confusion about the retirement plan and IRA rules. Recently, we were made aware of two cases where the attorneys didn’t know how an IRA should be split in a divorce and incorrectly used the employer retirement plan rules when drafting the documents used to divide the IRA.

As part of a divorce, you might be awarded some or all of your ex-spouse’s employer retirement plan funds (such as a 401(k) plan) or an IRA. While both employer plan and IRA funds can be awarded to you in a divorce, the rules for them are very different.

To split an employer plan, a QDRO (qualified domestic relations order) is the document that is given to your ex-spouse’s employer retirement plan. After the plan receives and approves the QDRO, you are usually then given the option to roll over the money to an IRA in your own name (tax-free).

IRAs, however, are split according to the divorce agreement, not a QDRO. A copy of the divorce decree or separation agreement is given to the IRA custodian. When an IRA is split in a divorce, transferring the portion of the IRA that goes to the former spouse via a direct trustee-to-trustee transfer to an IRA in the name of the former spouse is the best way to move the funds.

QDROs only apply to company retirement plans such as a 401(k). They do not apply to IRAs. The mistakes that the attorneys made in these two cases were that the divorce documents incorrectly referenced the QDRO rules, NOT the IRA rules. As a result, it is likely that the IRA funds were not properly split in the divorce because the letter of the tax law was not followed. Accordingly, the distribution from the IRA owner’s account would be taxable to the IRA owner and the deposit of those funds into the ex-spouse’s IRA would be treated as an excess IRA contribution.