What happens to an IRA during a divorce? Well that depends on the type of retirement plan you have and what state laws you must abide by. For most divorce cases, the IRA is split up along with other assets and property. This is executed through negotiations by both parties and defined in a document called a Domestic Relations Order.
Keep in mind that retirement plans fall under federal law, not state law. This means that only marriages that are legal under the law of the state in which the marriage took place may be recognized when filing a claim to an individual’s retirement plan assets.
The first step in determining which portions of retirement plan assets go to the two parties is to decide whether the non-account owning spouse wants a share of the retirement account or would like to exchange his or her share in that account for other assets of equal value. This option is considered the “present-day valuation buyout”. The other assets can be cash, stocks or property, which are typically easier to transfer than a retirement account.
The Internal Revenue Code §408(d)(6) dictates that the division of an IRA in a divorce allows for the ex-spouse/alternate payee to transfer the assets to his or her own IRA without incurring any taxes or penalties. Two transfer methods for divorcing couples are:
- Direct transfer– The spouse awarded the portion of an ex-spouse’s IRA will request the financial institution to transfer the funds to his or her name via a Domestic Relations Order. This is typically done at a financial institution using a transfer to the recipient’s new IRA account.
- Renaming method– The IRA owner transfers the assets he or she is entitled to keep to a new account in his or her name, and leaves the original account for the recipient, changing the name on the original IRA to that of the recipient. If all the assets in the retirement account are to be transferred to the recipient, only a name change of the existing account is required with the IRA trustee or custodian. This rarely occurs since the IRA trustee or custodian prefers to retain audit trails of each account.
It is important to consult with an attorney and tax professional before making any decisions on the division of retirement accounts in the case of divorce.
It is important that you understand how your IRA or retirement future may be impacted in a situation such as divorce. If your IRA may be subject to a divorce and you have any additional questions, contact Preferred Trust Company via email at email@example.com.
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