Distribution of IRA upon divorce

Submitted by alberto vega on Mon, 2019-11-04 21:17

Husband and wife both age 51 are divorcing now, probably final divorce in 2020. H has an IRA with a balance
of approximately $ 100,000. The plan is the IRA would be split 50% to each; therefore W will get approx $50,000 in 2020.

Is there a way H can avoid paying taxes on this split, other than H taking a loan from the IRA and giving the proceeds to W?



Submitted by Alan - IRA critic on Mon, 2019-11-04 23:22

  • There are no taxes due if this is done right. The 50,000 should be moved to the wife by non reportable transfer by providing a copy of the divorce decree to the IRA custodian after W opens an IRA to receive the transfer. This is not a distribution and therefore no taxes due for either of them. There is no 1099R issued.  It would be a big mistake for H to take a distribution, receive a 1099R, and give it to W since H would then owe tax and penalty on the amount distributed and W would not have the funds in an IRA. The process is called “transfer incident to divorce”.  If a qualified plan was also to be split, that would require a QDRO to split the qualified plan, but QDROs do not apply to IRA accounts.


Submitted by alberto vega on Tue, 2019-11-05 09:09

Do you have a reference for this tax free transfer to an IRS publication or otherwise



Submitted by Alan - IRA critic on Tue, 2019-11-05 15:29

  • Tax code Sec 408(d)(6):      (6) Transfer of account incident to divorce”The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in clause (i) of section 121(d)(3)(C) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.”
  • Also see Pub 590A – Transfer Incident to DIvorce

 



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