Dividing IRA Assets Upon Divorce

For many families, much of their wealth may be located in Individual Retirement Accounts (IRAs). If you're considering divorce, it's important to have a basic understanding of how to divide your IRA accounts.   However, we're not suggesting you do this on your own. The division of retirement assets can be tricky, so if you have specific questions, you should talk to an experienced family law attorney.

If you and your spouse have agreed that your IRA account will be divided between the two of you, you'll need to get a court order saying so.   The order must be clear as to how much will be transferred. Generally, when funds are transferred from one spouse to another under a court order pursuant to a divorce, the IRS allows these transfers to occur without assessing tax penalties. The funds transferred from the IRA are viewed as the recipient-spouse's property and, therefore, this conveyance (transfer) is acknowledged as tax-free. The IRS also offers two basic transfer methods for divorcing couples.

The most common method is the "direct transfer." The IRA owner-spouse may order the IRA trustee (IRA plan administrator) to transfer the necessary IRA assets directly to the trustee of a new or existing IRA in the name of the recipient-spouse.

Another alternative is to transfer the assets the owner-spouse is entitled to keep to another IRA, leave the necessary amount in the old IRA for the recipient-spouse, and change the name on this old IRA to that of the recipient. This is known as the "renaming method." A final alternative under the renaming method would come in handy if all the assets in the owner-spouse's IRA are to be transferred to the recipient-spouse; a simple method of transfer is to just change the name of the account on the records of the financial institution.

Given inherent reporting problems, the sixty-day rule, and the sometimes emotional environment of divorce, IRA rollovers are a less common solution than a direct transfer by the IRA trustee, which is most often recommended. Of course, the right alternative for you will depend entirely upon the particular facts of your case and should be chosen with the advice of an attorney and financial advisor.


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