Is There a Tax Consequence of Splitting an IRA in Divorce?

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Q. A member of my family has just divorced. The court asked him to give half of his IRA to his wife as part of the asset settlement. Within three days, he withdrew half of his IRA and deposited it into his own personal account, then transferred that amount to his ex-wife’s IRA. How does he report this transaction so he doesn’t have to pay taxes?

– try to help

A. There are provisions under which a transfer due to divorce would be tax-free.

But you have to make sure you do it right.

The marriage attorney representing your family member may not have given clear instructions on how to split the IRA, said Neil Becourtney, chartered accountant and tax partner at CohnReznick in Holmdel.

“A provision in the Internal Revenue Code provides for tax-exempt treatment if the transfer of an interest in an IRA complies with a divorce judgment,” he said. “The amount transferred is not considered a distribution to the owner of the IRA or the ex-spouse.”

The transfer can take the form of executing a separate document that assigns the ownership rights of the owner of the IRA in the account to the ex-spouse, he said.

Or, if the assets are held in a single IRA, the owner of the IRA can withdraw the portion of those assets that should go to the ex-spouse and then transfer them to a second IRA. Ownership of the second IRA could then be assigned to the ex-spouse, he said.

Or a court order could require a direct transfer of assets from the trustee sponsoring the IRA from the owner of the IRA to the sponsor of an IRA on behalf of the ex-spouse, Becourtney said.

“You should ask the marriage lawyer if the three days that the IRA was held personally by your parent invalidates the tax-free transfer processing related to the divorce,” Becourtney said. “Assuming the answer is yes, if 60 days have not passed since the withdrawal, the IRA can be canceled. Then it can then be transferred directly to the ex-spouse’s IRA to obtain a tax-free result.

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.



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