Timing Problems with IRAs and Divorce | Ed Slott and Company, LLC

Timing Problems with IRAs and Divorce

By Joe Cicchinelli, IRA Technical Expert

When a married couple gets divorced, IRAs can be divided as a result. So, if you’re in the middle of a divorce, you should know that some or all of your IRA can be awarded to your ex-spouse. The process is similar to how some of your other assets are divvied up, but there are major differences and special rules that apply when you’re dealing with an IRA.

Make sure you speak with an attorney to properly draft the legal documents you’ll need to divide the IRA. A QDRO (qualified domestic relations order) is never used to split an IRA in a divorce.

When the IRA funds (or assets) are properly transferred in a divorce, there won’t be any IRS reporting of the transfer and none of the transaction is taxable to either one of you. The IRA custodian should not issue a Form 1099-R to show the money leaving your IRA nor should they issue a Form 5498 to show the money deposited to your ex-spouse’s IRA.

To divide an IRA in a divorce, the money in the IRA (or assets such as shares of stock) should be directly transferred to the same type of IRA for your ex-spouse. So if you have an IRA, then transfer the funds to an IRA in your ex-spouse’s name; if you have a Roth IRA, transfer the funds to a Roth IRA in your ex’s name. The transaction must be done as a direct transfer; do not take a distribution from your IRA and give it to your ex.

While losing your IRA is a problem in-and-of itself, there are some unique problems that you might encounter along the way. One of the main issues could be the timing of the transfer. For example, if the legal document says that you owe your ex-spouse half of your IRA, it might not say when that valuation should happen. If your IRA is invested in securities that greatly fluctuate in value, the amount that is eventually transferred might be much more (or less) than you or your ex-spouse were expecting. This could lead to problems and even more litigation. So make sure the legal documents address the timing issue to save yourself more headaches.

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