IRAs After Divorce

According to a University of Arizona study, more than 20% of first marriages end in divorce within five years, and 48% of marriages dissolve by the 20-year mark.

When navigating these divorce cases, financial matters are among the most frequent topic of disagreement. The messy task of dividing up financial assets makes the difficult decision of divorce even more trying.

Divorce often involves splitting significant financial assets. Retirement savings accounts can comprise some of a couple’s most valuable assets. Whether you want to know about the legal process, mistakes to avoid when splitting retirement assets, or how to control your retirement assets after a divorce, this directory contains a comprehensive set of resources.

Key Definitions and Steps to Take

Laws on dividing property vary from state to state, but the general rules apply. There are important terms and steps to take to unravel the assets jointly held.

Identify the Property

A significant part of a divorce involves splitting assets between the divorcing spouses. Knowing what you own is an important starting point for a smooth property division in a divorce.

This step entails identifying all assets, including income, retirement benefits, royalties, real estate, investments, vehicles, etc. The resources below will help you identify, track down, and assign values to all your assets and ensure a smooth transition in a divorce.

• Understanding How Assets Get Divided In Divorce – This Forbes article offers help in understanding which assets will be best for your short and long-term financial security. It also gives insight into how to identify these assets during a divorce.
• How to Uncover a Spouse’s Retirement Funds During a Divorce – Not every spouse is honest and straightforward about disclosing assets in a divorce. And not everyone knows all of the details about their own retirement savings. This article can help you track down your spouse’s retirement funds.
• Commingling and the Separate Property Presumption Upon Divorce – This article demonstrates the importance of recognizing partial marital and separate interests in the same asset, including specific case law and its effect.
• Divorce Assets And Liabilities – Knowing what you own and what you owe is an important starting point for property division in a divorce. Learn what your divorce assets and liabilities are with this complete list.

Distinguishing Marital and Separate Property

It’s essential to distinguish marital and separate property during a divorce. Before the division of assets can occur, each spouse needs to identify which assets should be subject to division. The next step in determining the classification of assets as marital or nonmarital is to analyze how the property was acquired. These resources provide guidance on identifying which assets are marital and which are not.

• Separate and Community Property During Marriage: Who Owns What? – An overview of how property ownership works in marriage.
• How Do We Distinguish Between Community and Non-Community Property? – General rules for determining what’s community property and what isn’t.
• IRA as a Marital Property – An individual retirement account, which, as its name suggests, is individually owned by law, becomes marital property if couples contribute earned income to it during the marriage. This article provides the legal background on that.

Agreeing on Property Distribution

While couples can ask the court to decide on the division of properties, they can also work together through an agreement to determine which assets each spouse will take away.

This second method offers several benefits over a judge’s ruling. It takes less time. It reduces the financial and emotional costs of property division. And agreements can offer a cleaner separation for the couple.

• What is a Property Settlement Agreement? – A PSA is a binding contract that sets out separation and divorce terms. Learn how PSAs work and how they can help facilitate property settlement for your divorce.
• What You Need to Know Before Creating a Settlement or Separation Agreement. – This article covers property issues to equalize the division of assets.
• Violating the Terms of a Property Settlement Agreement – Along with another good definition of PSAs, this article gives a solid understanding of what occurs when the terms of one are breached.
• What to Include in a Property Settlement Agreement? – In individual states, the court may be unable to modify portions of the agreement. This article will guide you on what to include in a PSA.
• The Marital Settlement Agreement Checklist – A Marital Settlement Agreement (another name for a Property Settlement Agreement) stands out above other documents in importance. This article outlines the steps you need to protect your best interests.

Community Properties and Equitable Distribution

Forty-one states follow a process called equitable distribution. This process divides assets and liabilities based on fairness. The rest of the states, known as community property states, split marital assets equally. Learn about how state laws affect the division of properties in your divorce.

• Community Property – Legal definitions and concepts related to assets in divorce or the death of a spouse.
• Community Property States – This information guide indicates which states are classified as community property states and their laws requiring equal distribution of assets acquired during a marriage.
• Equitable Distribution – This article takes into account a variety of factors when dividing assets, including how long the parties were married, their needs, and the financial contributions made during the marriage.
• In a Divorce, Are Retirement Accounts Subject to Equitable Distribution? – By offering two scenarios, this article provides clarification on the equitable distribution of retirement accounts.
• Equitable Distribution and Your Benefits – Answers 33 of the most frequently asked questions on equitable distribution for retirement.

How Are Properties Divided at Divorce?

After determining which assets are involved and how your state determines agreements and equitable distribution, you are left with the actual asset division. Here are a few resources to help you keep the process as smooth as possible, including the tax consequences.

• Retirement Account is Community Property but Need Not be Split Equally – Learn about how state laws take effect on dividing community properties. This article provides a specific case that community property does not necessarily be split 50/50.
• Property Division by State – Learn more about the differences between community property and equitable distribution states and how actual splits are decided.
• Divorce and Property – This article includes resources to help those going through a divorce determine how property should be divided, what happens to shared debts, how to find hidden assets, what happens to the family home, the effect on insurance policies, and more.
• How to Transfer Assets After a Divorce – This article from Betterment will answer frequent inquiries to help understand what happens next in terms of dividing assets in a divorce.
• Divorce Settlement of Retirement Savings – Learn about negotiating retirement property settlements, employee plan concerns, and cautions.

Retirement Plans in a Divorce

Retirement savings are an essential issue in divorce proceedings. They are incredibly complicated as they may be subject to tax implications when not handled properly.

These resources offer valuable insights into properly managing your retirement savings during the division of assets in a divorce.

• What is a Qualified Retirement Plan? – This article summarizes what you need to know about qualified retirement plans, along with an example.
• Qualified Retirement Plan – Defines a qualified retirement plan with in-depth information on the defined benefits, contributions, and related taxes.
• Qualified Domestic Relations Order (QDRO) – Learning about qualified domestic relations orders (QDROs) during a divorce is essential. This article provides a general definition of a QDRO, its scope, and its limitations.
• What is a QDRO – This page answers frequently-asked QDRO questions. It also provides a list of necessary supplemental documentation to enforce a property claim.

Individual Retirement Arrangements

An individual retirement arrangement or account (IRA) is a type of tax-deferred or tax-advantaged retirement savings account. They are also among the most important properties to divide in a divorce. Here are some resources that offer definitions and proper handling of IRAs.

• Individual Retirement Arrangements (IRAs) – The IRS’s page on Traditional and Roth IRAs.
• Individual Retirement Account (IRA) – Understanding individual retirement accounts and how they work.
• Individual Retirement Account IRA Law and Legal Definition – Individual retirement account laws, legal definitions, and factors to consider when opening an IRA and its provisions.

The Correct Way to Transfer an IRA in a Divorce

Splitting an IRA in a divorce is unlike dividing a home, business, or other qualified retirement assets. Proper handling of IRAs is critical to ensuring rules are followed to avoid financial loss and further complications in a property settlement.

These resources offer vital information on governing rules, considerations, cautions, and proper ways of handling IRAs in a divorce:

• IRA Transfer – An introduction to IRA transfers.
• How to Split IRAs and Other Retirement Plans During a Divorce – This is an excellent guide on the rules that govern account division in a divorce, including how to avoid unnecessary taxes and financial loss.
• How to Split an IRA in a Divorce Proceeding – Learn about specific rules for splitting an IRA, methods of transfer, and tax implications.
• Transferring an IRA and 401(k) in a Divorce – Learn how governing rules differ from employer-sponsored retirement plans for IRAs.
• Section 1041 – Section 1041 of the Internal Revenue Code mandates that any transfer of property from one spouse to another is income tax-free. This section applies to transfers during the marriage and in the divorce process.
• What Paperwork Do I Need to Transfer Assets Due to My Divorce? – A checklist of the documentation needed during the transfer of assets in a divorce, specifically regarding retirement accounts.

Transferring IRAs: What You Need to Know

Unlike defined benefit plans, you need a divorce decree to ensure an IRA divides without triggering a tax on the transfer. A divorce decree is the final ruling order that makes the termination of a marriage official and financial assets divisible.

• Publication 504 (2019), Divorced or Separated Individuals – IRS Publication 504 explains tax rules that apply if you are divorced or separated from your spouse. This publication states in many ways how a divorce decree is a prerequisite in dividing financial properties.
• Why a QDRO is Not Necessary to Assign IRA Benefits to an Ex-Spouse – This article explains how dividing an IRA is more simplified than having a QDRO prepared.
• There is No Exception to the 10% Penalty for an IRA Due to Divorce – This FAQ section from the IRS outlines how divorce distributions are subject to a 10% penalty. This is a critical piece of the puzzle and could be costly.
• Transferring IRA Assets in a Divorce – Your retirement account custodian will play a big part in transferring IRA assets. To ensure a smooth handover, learn about their requirements and the specifics of the transfer itself.

Methods to divide IRAs

Withdrawal or Distribution

Individuals can choose to distribute a portion or all of an IRA and directly distribute it to both parties. Typically, distributions from an IRA or other qualified retirement plans before the age of 59½ are subject to a 10% penalty and income tax. Here are some resources you can read:

• Distributions from Individual Retirement Arrangements (IRAs) – Publication 590-B definitively discusses distributions from individual retirement arrangements.
• IRA FAQ – Distributions (Withdrawals) – You can take distributions from your IRA anytime, including in a divorce. This page answers frequently asked questions about IRA distribution.
• Exceptions to Tax on Early Distributions – This IRS reference tells what circumstances are subject to tax exceptions on early distribution.
• How to Withdraw, Transfer Out, or Close Account – This article will walk you through how to withdraw from a taxable account or an IRA, as well as transfer your account to another provider.
• The Wrong Way to Split an IRA in a Divorce – This article contains a case study of how an IRA early distribution or withdrawal can be an unwise decision in a divorce financial settlement.
• Can Relaxed Retirement Plan Withdrawal Rules Help Settle Your Divorce? – The newly implemented CARES Act provides relaxed retirement account withdrawals. This article outlines what you need to know.

Rollover and Transfer

A typical rollover during a divorce occurs when one spouse withdraws money from their IRA account and gives it to the ex-spouse to redeposit into another IRA account. You can choose to have awarded amounts rolled over directly to your ex-spouse through an IRA account. On the other hand, a transfer is when funds or assets are sent directly between institutions. These resources will help you.

• What is a Rollover? – Learn more about rollovers in retirement accounts and the general rules that apply.
• Rollovers of Retirement Plan and IRA Distributions – This IRS article contains necessary information about rollovers to determine which rollover process is most appropriate for your case.
• IRA Rollover and Divorce – Learn about tax considerations on rollovers when settling retirement properties in a divorce.
• IRA Direct Rollover – You can roll over assets directly from your IRA to another IRA and other qualified plans. This is also called a transfer. Learn more about direct rollovers here.
• IRA One-Rollover-Per-Year Rule – Here’s a digestible explanation of the IRS’s One-Rollover-Per-Year rule.
• 7 Things You Need to Know About the Once-Per-Year Rollover Rule – Here are seven things you need to know about the IRS 509 ruling that has tripped up many taxpayers.
• Common IRA Rollover Mistakes – Rollovers can be relatively easy, but specific rules must be followed. This article will give you an overview of IRA rollover rules and discusses how to avoid common mistakes.
• IRA Rollovers: How to Avoid Mandatory Withholding – A guide on properly executing an IRA rollover to avoid tax withholding.

Transfer Ownership

If you are awarded 100% of your spouse’s IRA, you may be able to change the name on the account to your name. Transferring ownership does not split an IRA. It instead grants all rights and control of an existing IRA to one party for a new account to take effect.

• How to Transfer Ownership of an IRA in a Divorce – You can’t open a joint IRA. However, a couple of exceptions, including divorce to this rule, can result in a transfer of ownership.
• How to Transfer Ownership of an IRA – When a divorce decree grants a spouse 100% rights to an IRA, the recipient spouse can choose to rename the IRA. Learn how to update an IRA ownership.
• How to Re-Title Your Inherited IRA Account – This article is a guide to retitle IRA assets. A similar procedure applies to retitling an IRA account under a divorce decree.
• Moving IRA assets under divorce decree – One way to move IRA assets in a divorce is by changing the name or an ownership transfer of the account. This article provides critical ideas for moving IRA assets.

Tax-Free Division of IRAs for Divorcing Couples

Internal Revenue Code section 1041 provides that a transfer between former spouses, “incident to divorce,” is not taxable in most circumstances. This includes transferring interest in non-qualified plans such as an IRA under a divorce decree or separation instrument. There are two basic disposition options available to you and your former spouse:

1. The transfer of all or a portion of the interest in a traditional IRA to a former spouse, under a divorce decree, or
2. Separate maintenance or a written instrument incident to the order, which isn’t considered a taxable transfer.

Here are some resources on this vital subject:

• Is Dividing Assets Due to Divorce Considered to be a Taxable Event? – This article answers essential questions about dividing assets in a divorce and the governing tax rules and exceptions.
• Tax-Free Division of IRAs for Divorcing Couples – The IRA transfer is tax-free to both spouses only if a decree requires the transfer of divorce explicitly. Learn how to divide IRA assets without triggering taxes.
• How to Make Divorce Less Taxing – This article enumerates ten things about taxes and divorce you should know.
• Exceptions to Tax on Early Distributions – This IRS reference tells what circumstances are subject to tax exceptions on early distribution.
• Divorcing Clients? Here’s How to Split an IRA – The consistency of the IRS in its decisions has shed light on how it views the splitting of accounts during a divorce as non-taxable.
• Dividing IRA Assets Upon Divorce – Common, tax-free IRA transfer methods.
• What Is Rule 72(t)? – Rule 72(t) allows penalty-free withdrawals from IRA accounts and other tax-advantaged retirement accounts.

To ensure that a splitting process does not trigger taxes, the transfer must be done by:

• Changing the name on the IRA from your name to that of your former spouse (if transferring your entire interest in that IRA), or
• A trustee-to-trustee transfer from your IRA to one established by your former spouse.

Changing the name on the IRA

Changing the name on the IRA or an ownership transfer is guaranteed to be tax-free under a divorce decree. A divorce decree can award 100% rights and control over an IRA. Here’s how that works:

• How to Transfer Ownership of an IRA – When a divorce decree grants a spouse 100% rights to an IRA, the recipient spouse can choose to rename the IRA. Learn how to update an IRA ownership.
• Moving IRA Assets Under Divorce Decree – This article provides vital ideas for renaming an IRA tax-free.
• How to Transfer Ownership of an IRA in a Divorce – More information about ownership transfer.

Trustee-to-Trustee Transfer

Directly transferring funds from one account to another is also a tax-free way to split assets during a divorce, as long as there’s a divorce decree. Here are some resources on this process:

• IRA Trustee to Trustee Transfers – This article answers how moving your IRA funds from one IRA to another should have no tax implications.
• Transfers vs. Rollovers: What’s the Difference? – Transfers and rollovers are methods of moving IRA assets. This article will guide you through the best methods to avoid triggering taxes and how to start the process.
• How Direct IRA Transfers Work – A direct rollover or trustee-to-trustee transfer is one of the simplest ways to transfer IRA assets without triggering taxes. This article summarizes what you need to know about a direct transfer.

Transfer Incident to a Divorce

No gain or loss is recognized when a property is transferred between spouses during the marriage. This rule also applies to transfers between former spouses if there is an “incident to a divorce.” A transfer is considered the incident to a divorce if it occurs within one year after a marriage ends or is related to the ending of a marriage

• Transfers of Property Between Spouses or Incident to Divorce – The legal language, general rules, and provisions of Internal Revenue Code Section 1041.
• How to Split IRAs and Other Retirement Plans During a Divorce – This article outlines the proper general handling of IRA transfers and explains how a transfer incident governs asset division after a divorce.
• Transfer Incident to a Divorce – Here’s a case study that discusses section 1041 implications when transfers of property result from an incident to a divorce.
• QDRO vs. Transfer Incident to a Divorce – This article discussed the primary differences between QDROs and transfer incidents.
• Basis of Property Transferred Between Spouses Incident to a Divorce – Helpful insights on pertinent issues related to transfer incident to a divorce.

Best Practices in Transferring IRA in a Divorce

No matter how assets are split and reordered during and following a divorce, there are some best practices you should always try and observe.

• Reviewing a Settlement Agreement Checklist (Federal) – This checklist explains how to review a settlement agreement and covers preparatory steps, communicating with adversaries, settlement terms, ambiguity, confidentiality, relevant parties, breach provisions, releases, and final approval.
• IRAs and Divorce: Tips for Saving Taxes and Time in Dividing IRA Funds – Helpful tips to avoid complications and unnecessary delays in transferring IRA funds. This includes considering establishing the new IRA at the same institution as your spouse’s.
• Keep Close Tabs on Legal and Advisor Fees – Advisor fees can be an additional burden on costs when undergoing a divorce. If you decide you want to work with a financial advisor, this article provides best practices for paying your retirement advisor.
• Avoid Premature IRA Splits Before a Divorce – Best practices to split up IRAs without unfavorable or unexpected tax results.
• Moving Retirement Plan Assets: How to Avoid Mistakes – Be informed about proper transfer transactions permissible under current regulations.
• Ways to Protect Your Retirement Savings After Divorce – An excellent resource on how to protect your IRA in a divorce.

Disputes and Common Mistakes Around IRAs in a Divorce

Mistakes involving IRAs can increase the financial and emotional toll of divorce on both sides. These mistakes can end up hurting your position in the case, as well as impacting your retirement plans and financial security.

Below are valuable resources on disputes and common IRA transfer mistakes in a divorce.

• Moving Retirement Plan Assets: How to Avoid Mistakes – Be informed about proper transfer transactions permissible under current regulations.
• 7 Mistakes You Can Make When Transferring Your Ex-Spouse’s Defined Contribution Plan into an IRA — And How to Avoid Them – A solid rundown on what to look out for when transferring retirement accounts.
• The Wrong Way to Split an IRA in a Divorce – This article contains a case study of how early distributions can become problematic in a divorce financial settlement.

IRA One-Rollover-Per-Year Rule

According to the IRS, you are only allowed one IRA rollover in any 12-month period. Divorcing couples planning to initiate a rollover might also fall into this trap.

• IRA One-Rollover-Per-Year Rule – The IRS page with the whole language of this rule.
• The One IRA Rollover Per Year Rule: What You Need to Know – Here’s what you need to know to complete a successful rollover without incurring unnecessary taxes.
• IRA One-Rollover-Per-Year Rule – Here’s a digestible explanation of this rule.
  7 Things You Need to Know About the Once-Per-Year Rollover Rule – Here are seven things you need to know about the IRS 590 ruling that has tripped up many taxpayers.
• A Fatal IRA Rollover Error – In the past, the IRS applied the rule separately to each IRA. But that is no longer the case. Based on the more recent IRS publications, this article clarifies that the rule applies in the aggregate to all IRAs and Roth IRAs.

Premature IRA Splits

Since certain rollovers, transfers, and retitled accounts require a divorce decree explicitly laying them out, prematurely splitting up IRAs can be disastrous. Here are a few resources on that subject:

• Is it Legal to Close an IRA Before a Divorce? – This article lists the issues arising in divorce cases and highlights scenarios in handling property settlements.
• Avoid Premature IRA Splits Before a Divorce – A tax-free IRA transfer transaction is possible if the transfer is required by a written divorce decree or separation instrument. This article will help you avoid unpleasant tax surprises.

Protect your Assets with a Prenuptial Agreement

Prenuptial agreements are safeguards that allow spouses undergoing divorce to choose how they want to deal with finances and marital disputes ahead of time instead of relying on state laws and courts to define property settlement. Prenups can help you avoid possible property division and divorce complications.

This directory will help you learn when and why a prenup is advisable and how to prepare one.

• Prenuptial Agreements and Their Effect on Property Division in a Divorce – A prenup agreement will be presumed to be enforceable in the event of a divorce. This resource offers a guide to how that works.
• How a Prenuptial Agreement Changes the Divorce Process – Learn more about prenups and how they can affect divorce proceedings.
• Can I Protect Retirement Funds with a Prenuptial Agreement? – When it comes to retirement funds, spouses are sometimes surprised to learn that retirement funds will also be divided. But this confusion can be avoided with a prenup.
• A Prenup Can Protect Your Investments – Prenuptial and postnuptial agreements can cover several topics, including your investments. Here’s what you need to know.
• Articles on Prenuptial Agreements – This directory on the NOLO Legal Encyclopedia lists resources you can use to understand prenuptial agreements in more detail.
• Should You Get a Prenup? – This article enumerates the risks and reasons for getting a prenup.
• 8 Myths About Prenups You Should Stop Believing –This article looks at eight of the most common myths associated with prenups.
• INSIGHT: How a Prenup Can Trigger a Brawl Over Retirement Benefits – This article analyses a case study on how a prenup can trigger complications over retirement benefits.
• Prenuptial Agreements: What Does the Law Allow? – Understand what you can accomplish by making a prenuptial contract before you marry.
• Prenuptial Agreement Benefits and Drawbacks – Explains how a prenuptial agreement is a legally binding contract that determines how spouses will divide assets and debts in the event of a divorce.
• 5 Prenuptial Pitfalls to Consider – Having One May be Bad for Your Marriage – This article provides an overview of five potential prenup pitfalls that future spouses should consider before signing such a contract.

How to Build an Iron-Clad Prenup

Having a plan for assigning assets and liabilities is often a wise action while things are at their best. A prenup must meet standards of fairness and honesty to be valid and enforceable.

Although a prenup is a binding contract, it can be invalidated. Here are some resources to help you craft an iron-clad prenup.

• How Courts Determine the Validity of Prenuptial Agreements – Learn about specific criteria that determine the validity of a prenuptial agreement to build your iron-clad prenup.
• Here’s How to Bulletproof Your Prenuptial Agreement – A well-executed prenup can save a couple from financial and emotional heartache. This is a guide on how to bulletproof your prenuptial agreement.
• Prenuptial Agreements – Planning for The Future – This article lists what items to include and not to include in your prenup, how to ask for one, and what can invalidate your agreement.
• Creating a Prenuptial Agreement – A prenup agreement should address how property will be divided upon separation, divorce, death, etc. This article details the items you need to consider in your analysis and writing a prenup agreement.
• Prenuptial Agreements: Who Needs It and How Do I Make One? – Here’s a guide to help you make a valid prenup.

Conclusion

You have a long list of issues when you go into court for a divorce trial. If you’ve got a business to value, children involved, accusations of infidelity and abuse, something like a retirement account can fall by the wayside.

If this subject is not spelled out, it may be left out in a divorce proceeding, and you could suffer financially. Educating yourself is the first step in ensuring a successful divorce and retirement. Be sure to take the necessary legal steps to protect your rights and hire qualified people to ensure your best interests are protected.