Community Property and Your IRA: What You Need to Know

By Sarah Brenner, IRA Analyst
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What do you get when community property mixes with your IRA? You will discover that the results can be confusing. Here are some facts every IRA owner should know.

Community Property States

The community property system has been adopted by nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin. Alaska has adopted an optional community property system. Are you off the hook when it comes to community property if you currently live in another state? Not so fast. Society is increasingly mobile. It is not uncommon during a lifetime to move to and from community property states.

How Community Property Works

Community property is everything a husband and wife own together. In general, this includes all money earned and property acquired during the marriage. How do your IRAs fit in? Assets held in an IRA will be community property to the extent that contributions were made to the account and earnings accrue during the marriage.

It’s important to keep in mind that community property is like ice cream. It comes in many different flavors and each state will have its own unique flavor. California community property law is not the same as Arizona community property law.

When to Pay Attention

When are community property issues likely to come up with your IRA? Well, generally, there are two significant times where you might encounter these issues as an IRA owner: when it comes to determining who gets your IRA after a divorce or death.

Divorce

In community property states, a spouse may have a community property interest in the other spouse’s IRA. By doing a trustee-to trustee transfer, this interest can be moved from one spouse’s IRA to the other spouse’s IRA without negative tax consequences. You will need a court order for this transfer to be done.

Naming IRA Beneficiaries

Since community property law can dictate who gets your IRA after death, it must be taken into account when you name a beneficiary on an IRA. In a community property state, state law may recognize your spouse as the beneficiary of some or all of your IRA. Therefore, you may need to get your spouse’s written consent to name someone else as the beneficiary of your IRA.

Some IRA custodians have beneficiary designation forms with language for spousal consent to name a non-spouse beneficiary. Others do not. Even if a beneficiary designation form does include spousal waiver language, some experts caution against relying on it. To be sure that all goes as planned, the safest approach is for you and your spouse to each have your own separate counsel and for an experienced attorney to draft the necessary documents.

Consult an Expert

Now you know that community property can raise some complicated issues where your IRA is concerned. It is best to be prepared. If you have questions about how community property rules affect your IRA, a good place to start is a consultation with a knowledge financial or tax advisor who knows both the IRA rules and the property transfer rules.