It's hard to get divorced even before splitting homes, cash, child custody and other assets and responsibilities. But some shared things can be more complicated to split. One of the most complicated assets to manage or split is an individual retirement account (IRA), due to the tax implications involved.
How can I make a tax-free IRA transfer during a divorce?
There are two ways to split the value of a single IRA during a divorce. The first is to change the name of the account's beneficiary to the former spouse, which does not change the legal status of the asset. The other is to transfer assets from the IRA into a new one under the name of the former spouse. This does not change the legal status of the money in the account.
What would happen if I just withdrew money to share with a former spouse?
Once money is withdrawn from an IRA before the preset retirement age, it is legally treated as cash and subject to the same taxation or restrictions as any other early withdrawal. A Michigan doctor learned this the hard way when six years after his divorce, he was called into tax court to answer for taxes on $140,000 in withdrawals transferred to his ex-wife.
How do I avoid losing money on an IRA split during a divorce?
Options are limited, but an attorney may make the decision and later actions easier during a difficult or expensive divorce process. A lawyer may be able to help with new or complex solutions that are not immediately clear.