Legally, you can close a traditional IRA and empty it out any time you want. The catch is that have to pay tax on your withdrawals and a 10 percent penalty. If your goal is to withdraw money and divide it as part of your marital assets, you can do that tax-free -- but you have to wait until after the divorce.
IRAs in Divorce
In community-property states, your spouse has a claim on half the money you put in your IRA during the marriage, and probably half the earnings. Even in other states where that's not true, you can choose to give your spouse all or part of an IRA as part of a divorce settlement. If everything's done properly, you don't owe any tax on the withdrawn assets you turn over to your spouse. Instead, the tax bill -- if any -- goes to her.
The IRS gets very nitpicky about which divorce arrangements deserve to go through tax-free. There are several legal cases where the account owner closed his IRA before a divorce, withdrew the money, then wrote a check to his ex. The courts sided with the government's position that this was simply the account owner withdrawing money, then giving some of it to the ex-spouse, rather than a tax-free transfer. The owner had to pay taxes on the withdrawal as a result.
Getting It Right
Even after the divorce, simply withdrawing funds and closing the account can saddle you with the tax bill if you don't follow procedure. To avoid the taxman's wrath, either change the name on your account to that of your spouse or have your account trustee roll over the appropriate amount to your spouse's account. If you're only giving up part of your retirement money, have the trustee transfer just that portion of the account.
If you're splitting the IRA with your ex, that's simple enough, but if you're offsetting assets -- he gets the IRA, you get the house -- you have to figure out the value of the assets. Even if you know what your IRA is currently worth, it has the added value of tax-deferred growth over the years. The income tax your spouse will pay when withdrawing from a traditional IRA reduces its value. It may take an accountant to get the balance right.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.