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.

Divorce, taxes, and IRAs

When a marriage ends, you’ll find yourself asking many questions. What happens to assets like IRAs? When transferring or splitting funds in an IRA, am I responsible for any taxes?

Section 408(d)(6) of the Internal Revenue Code governs that the transfer of an individual’s interest in an IRA to a spouse or former spouse is not a taxable transfer. The spouse who gives up the assets is not responsible for any tax or penalty of future distributions that occur. The spouse who receives the assets as his or her own IRA will be responsible for any taxes and penalties from future distributions.

A divorce decree is required to transfer IRA funds to a spouse or former spouse, tax-free.

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, or a document as defined in IRC Section71(a)(2). 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.

Transferring an IRA

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

  • By transferring a fixed dollar amount or percentage of the owner’s IRA to the spouse’s IRA.
  • 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. Note: If funds are cashed out/distributed and then paid to the spouse/ex-spouse, this is considered a taxable event to the owner of the original IRA. It is important that the movement of funds is done as a transfer and not a distribution.

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.

The tax information in this article is not intended to be used, and cannot be used, to avoid possible tax penalties. It was written to promote the products and services the article describes. TIAA-CREF and their affiliates do not provide tax or legal advice. Taxpayers should consult an independent tax advisor and attorney for advice based on their own particular circumstances.

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