IRAs and Divorce

In the unfortunate event that a marriage ends in divorce, it may be useful to understand the consequences on the spouses’ IRAs. It should be noted that this is a complex subject that warrants consultation with an attorney.

Section 408(d)(6) of the Internal Revenue Code governs the matter of a transfer of an IRA in divorce. And the Code states that the transfer of an individual’s interest in an IRA to a spouse or former spouse is not a taxable transfer. The transfer is to be treated as from a spouse, not from an unrelated individual.

What’s required to make this tax-free transfer is a decree of divorce, a decree of "separate maintenance," or a written instrument incident to such decree. A judgment of dissolution would be a decree of divorce. An order dividing the IRA could be entered as part of such a judgment or at any time after the judgment is entered.

Mechanics of an IRA Transfer

The actual transfer is fairly simple and can be accomplished in one of two ways:

  1. by transferring a fixed dollar amount or percentage of the owner’s IRA to the spouse’s IRA.
  2. by setting up a separate IRA for the amount to be transferred and then assigning this new account to the spouse by changing the name on the account.

Securities can be liquidated or transferred in kind and expenses may be shared or paid by one of the parties. It’s advisable that the court order spells out the terms of the transfer to avoid unnecessary delays or the need for further negotiation.

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