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How should IRAs be split during property division?

When divorcing couples in Nashville think about property division, their immediate concerns may involve their tangible assets. Who gets the house, furniture and electronics, among other pieces of personal property? However, they should keep in mind that some of their most valuable assets are intangible property. Retirement accounts are one of these assets. It is important that retirement accounts are divided fairly, but there are rules involving the division of a retirement account that do not apply to tangible property.

For example, dividing an Individual Retirement Account has certain tax rules that need to be adhered to. First and foremost, in order to avoid triggering taxes on the IRA when it is being transferred, the couple must have a divorce decree in place. Some couples, wishing for a more amicable split, may have already made property division decisions on their own out of court. However, even if they sign a property settlement agreement, this is not enough. That agreement must then be presented to a court, so the court can make it part of the official divorce decree. Moreover, if the divorce decree does not mention that the IRA is going to be split or transferred, this will not be enough to avoid taxes.

Also, a Qualified Domestic Relations Order, which is necessary when dividing other types of retirement accounts, does not apply to IRAs. This is unfortunate, as plans that do involve a QDRO and are paid to the designated alternate payee, are exempted from the 10 percent tax penalty. If a couple wants to divide an IRA via their divorce decree, they need to transfer the funds directly from one party's IRA to the other party's IRA. This is called a trustee-to-trustee transfer, and, if executed correctly, allows the parties to avoid the 10 percent tax penalty.

That being said, if the party who obtains the funds wants to take money out of the IRA, that distribution may still be taxed. In addition, if the party is less than 59.5 years old, a 10 percent early distribution penalty will also be assessed on the distribution.

As this shows, dividing an IRA in a divorce can be quite complicated. Readers who are facing property division and have questions about dividing retirement accounts are encouraged to contact their attorneys, as this post only provides general information and cannot be relied upon as legal advice.

Source: Financial Planning, "The wrong way to split an IRA in a divorce," Ed Slott, Aug. 31, 2017

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