Nobody plans for divorce, but the reality of this statistic means it could happen. If you are divorced or in the midst of divorcing and negotiating the myriad of issues that come with separating lives, you understand the complexities of disentangling assets.
When divorcing, a couple’s financial assets will be split in some manner between the two. Whether it is a 50/50 split or a skewed percentage, mistakes can easily be made when splitting up a retirement account.
Individual retirement accounts (IRAs) may be divided by a regular court order or judgment.
It’s important to be aware of the tax consequences and potential delays involved in the transfer of IRA funds when negotiating the divorce settlement.
- The IRA transfer is provided for in your divorce decree or property settlement agreement, AND
- The funds are transferred directly from one spouse’s IRA to the other spouse’s IRA
Use Specific Language
IRAs are divided using a process known as “transfer incident to divorce,” while other qualified plans are split under the “Qualified Domestic Relations Order” (QDRO). Mixing up the terms upon submission can lead to confusing complications.
However, if you decide to roll those funds over to an IRA and then decide that you want to use them before age 59 ½, you will have to pay the early distribution penalty.