Divorce can cause significant upheaval to your life in the present, but it can also have lasting implications on your future. While it’s logical to consider the immediate financial impact of divorce, it’s smart to be aware of how it will affect your retirement as well.
Your retirement accounts are assets, and as such they are subject to division during divorce proceedings. If you hold multiple types of retirement accounts, you should be aware that their division is not uniform. In the case of Individual Retirement Accounts (IRAs), which are common and often significant holdings, there are unique tax and distribution aspects to consider.
What is required to divide an IRA?
Compared to other retirement plans like a 401(k) or an employer-sponsored pension, dividing an IRA is fairly simple. For one, an IRA doesn’t require a Qualified Domestic Relations Order (QDRO) to separate the funds, and for two, the funds can go directly into the other spouse’s IRA. Both spouses do need to have an existing IRA, and if one does not, they’ll need to establish one. Also, both a fixed amount and a percentage of an IRA are eligible for transfer.
When dividing an IRA in a divorce, there are tax implications to consider. Per the IRS, the spouse who turns over assets in an IRA is not responsible for the tax consequences on any future distribution of those funds. The spouse who receives the assets, however, will take on the penalties or taxes related to later distributions.
Essentially, in a divorce, the division of an IRA is what the IRS considers a “taxable transfer.” The IRS does require a written decree of divorce to grant this tax exception.
Because you and your spouse may hold multiple IRAs and various other retirement accounts, it can be wise to consult with both legal and financial experts before initiating any divorce proceedings.