IRA Rollover and Divorce
The IRS imposes penalties if you have any unqualified early IRA withdrawals. During a divorce, the money in an IRA is divided between the spouses if it is considered community property in your state. This division could result in early distributions and tax penalties, so the IRS has taken divorce into consideration and made allowances for it. A rollover is not one of these allowances. A rollover occurs when one spouse withdraws money from his IRA account and gives it to his ex-spouse to redeposit into another IRA account. This type of transaction is not allowed as part of a divorce proceeding without incurring penalties.
The divorce court determines how much each spouse receives from the IRA. This calculation includes all monies contributed to the account as of the date of the marriage. Any amount put in the account before this date or after the marriage has officially ended is not included in the divided total. A spouse cannot take money from his IRA and give it to his ex-spouse. Jones v. Commissioner determined that this is not a valid way to transfer IRA proceeds as part of a divorce. Any money withdrawn this way is penalized as a taxable distribution.
As part of the divorce proceedings, the court issues a qualified domestic relations order that lists all assets, asset totals and how the assets will be divided between the spouses; it should include a dollar amount of the percentage of the IRA that each spouse receives. The Internal Revenue Code requires that this order be in writing in order to transfer the ex-spouse's portion. The divorce decree must also specify that any IRA transfers are as a result of the divorce and are intended to be tax-free under the Internal Revenue Code.
If the transfer of funds is not done according to the qualified domestic relations order, the Internal Revenue Service will place a 10 percent penalty, including income taxes, on the portion that is withdrawn from the account. The qualified domestic relations order essentially determines that both spouses own the IRA account; therefore, any transfer amount between spouses should not be considered a taxable distribution.
To avoid tax penalties, the IRS allows two methods of transferring IRA funds to an ex-spouse. If one ex-spouse is receiving the entire amount of the IRA, simply change the name on the IRA account from the spouse that owns the IRA to the ex-spouse's name. If the ex-spouse is receiving only a portion of the IRA account, conduct a direct transfer -- move the money from the IRA of one spouse directly into the IRA of the other spouse. Neither spouse will receive any cash as part of the transaction.
Based in New York City, Ben David has been a writer since 2006. His expertise extends into the fields of business administration, new media technologies, consumer electronics and mobile device technology and design. David studied Communications at Howard University.