Transferring IRAs Incident to Divorce

When an IRA is transferred from one spouse to the other spouse in a divorce, the interest in the IRA is treated as the recipient spouse’s IRA; the transfer between the spouses is tax-free. [IRC 408(d)(6)]

Three Methods of Transferring IRAs:

First, change the owner’s name on the IRA.  If the entire IRA is to be transferred, change the name of the IRA on the records of the financial institution holding the IRA.

Second, complete a trustee-to-trustee transfer.  The financial institution holding the IRA account is the trustee of that IRA.  You are allowed to transfer the IRA in whole or in part to either a new trustee, new trustees, or a new IRA account with the same financial institution.

Third, complete an IRA rollover to a new or existing IRA account in the name of the recipient spouse.  Or, take an IRA distribution in the form of cash, give that distribution to the recipient spouse, and the recipient spouse is responsible for contributing the distribution to a new or existing IRA in the recipient spouse’s name.

Finally, The owner of the IRA can withdraw the assets, roll these assets into another IRA in the IRA owner’s name, and then change the name to the recipient spouse’s name.

Remember:  The mandatory 20% withholding does not apply to transfers between IRAs.  However, rollover distributions from a qualified retirement plan to an IRA involve the mandatory withholding.  Also, in the case of a cash distribution, the funds must be back in any IRA account within 60 days.  If not, the distribution is fully income taxable and, if  you are under age 59 1/2, subject to penalty.

Before doing anything with you IRAs please consult with a professional financial advisor, CPA, and your attorney.



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