In the midst of a divorce, you may find that your retirement account is the biggest asset to divide.Your IRA account will need to be divided between you and your ex-spouse. Following the correct legal procedure to divide your IRA account will keep the IRS from classifying the division of the account as a taxable transaction.
On your own or with the help of your lawyers, you and your ex-spouse will have decided how to divide your assets, including your IRA accounts, or the court will issue a decision about the division. Your divorce papers should include language specifying that the transfer of IRA assets is made as part of the divorce and is deemed to be a tax-free transfer under section 408(d)(6) of the Internal Revenue Code.
Transfer of Accounts
You will need to carry out the transfer of the IRA assets in whatever manner the divorce paperwork specifies. If an entire account balance is going to be transferred, you can change the owner's name on the account to the name of the person receiving the funds. If the account will be divided, you can have the IRA trustee transfer the funds according to the instructions on the court order.
The transfer of IRA assets must take place after the divorce is final. If you attempt to withdraw funds to transfer them before you have a court order, the withdrawal from the IRA will be considered a taxable event. In addition to paying any taxes due at your normal income tax rate, you may have to pay a 10 percent penalty on the money that you withdraw.
Qualified Domestic Relations Order
For splitting workplace retirement plans, such as 401(k) accounts, the court issues a qualified domestic relations order as part of your divorce decree. The QDRO names the person participating in the plan, as well as the alternate payee. It also specifies what percentage or dollar amount of the account assets are to be released to the alternate payee. The QDRO also should specify that the order is being set up under your state's domestic relations laws, as well as section 414(p ) of the Internal Revenue Code. Contact the administrator of your workplace retirement plan to initiate the QDRO.