Tax Due on IRA split due to divorce?
Hi,
I read an article today online where a wife was receiving part of her ex husbands IRA due to the settlement of the divorce. My question is can she in fact complete a “rollover” from her husbands IRA into hers and not pay the taxes? Wouldn’t that still be treated as a distribution and therefore fully taxable? The link to the article is below.
http://finance.yahoo.com/news/Exhusband-offers-lousy-IRA-brn-14930618.ht…
Thanks,
Brandon
Permalink Submitted by Clyde Wolf on Sat, 2009-04-18 21:07
Brandon,
When the funds qualified to be rolled over by the owner, and there is a Qualified Domestic Relations Order (QDRO) the funds can be rolled over to to an alternate payee (spouse, former spouse, child, dependent) and retain the same status as the original plan participant.
When some amount is not properly rolled over, it would be taxable and a penalty may apply.
See IRS PUB 590 Individual Retirement Arrangements, page 29.
Permalink Submitted by Alan Spross on Sun, 2009-04-19 00:44
The article is not clear about what the decree actually said. If the wording was not clear that a “transfer incident to divorce” was mandated, the IRA custodian is not going to release the funds in a non reportable transfer (no 1099R. If a distribution is paid to the receiving spouse, it cannot be rolled over. Therefore, it is vital that the attorney of the receiving spouse be clear in wording the decree, and be aware of retirement plan issues. A QDRO is not required to transfer an IRA, as it is for a qualified plan, but the order still must be clear.
In some cases, a transfer incident to divorce is not the best way to handle this. If the receiving spouse needs the funds to pay current expenses and happens to be in a higher bracket than the IRA owner spouse, having the IRA owner take a distribution and pay a specified net amount to the receiving spouse will result in a lower cost for tax and penalties.
Permalink Submitted by Jose Morales on Mon, 2009-04-20 23:58
From the article…
[quote]by doing a direct transfer into an IRA rollover[/quote]
Seeing things like this make my head come close to exploding. I’d like to add to what the author of that article wrote by saying you shouldn’t take tax or retirement plan advice from Yahoo Finance.
When it comes to splitting up IRA funds upon divorce you will absolutely want to have a court give an order to have funds transferred from one spouse to another. As great as it may be for the divorcing parties to agree to split the IRA funds, doing so voluntarily will result in a distribution (premature or normal), which will be reportable. The wording of the order is very important as well. If a court order ever stated to split the funds by “a direct transfer into an IRA rollover” you might have some problems with figuring out exactly what the court wants the IRA custodian(s) to actually complete.