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Divorce and the Management of Tax-Favored Retirement Accounts (cont’d. IRA)

On Behalf of | Feb 9, 2013 | Cost of Divorce

In a divorce, you don’t need a QDRO to divide up an IRA between you and your soon-to-be ex without dire tax consequences. You can simply arrange for a tax-free rollover of money from your IRA into an IRA set up in your ex’s name. Then your ex can manage the rollover IRA and defer taxes until he or she begins taking money out of the account.

As with a QDRO, this procedure ensures that your ex, and not you, will owe the resulting income taxes. These rules apply equally to traditional IRAs, Roth IRAs, SEP accounts, and SIMPLE IRAs (they are all considered IRAs for this purpose).

You still need to be careful here. The nice tax-free rollover deal only applies when your divorce agreement requires the rollover. What happens if money from your IRA gets into your ex’s hands before or after the divorce without such a requirement? You’ll be treated as if you received the money, and you’ll be on the hook for the related taxes-even though you didn’t actually keep the money. Plus you’ll usually owe a 10% penalty tax if you’re under age 59½.

To avoid this fate, you should never transfer IRA money to your ex in advance of a legal requirement in your divorce papers to do so.

You can divide up tax-favored retirement account money the tax-smart way or the tax-dumb way. Unfortunately, some otherwise-competent divorce attorneys know little or nothing about taxes. Our firm does.

You need a legitimate tax pro who has handled lots of divorce-related tax issues on your side. While your attorney might be able to fill that role, don’t take it for granted. With higher taxes now in effect, this is an even bigger issue than before.