Question: My husband and I are negotiating our divorce agreement. We both have traditional IRA’s, and he has a 401 (k) and pension. Our youngest son, 16, will begin college in a couple of years, and my husband wants us to transfer some of our IRA money to our son to help pay for his college. Can we do this? Also, what is the difference between the IRA, pension, and 401 (k) when it comes to my getting my share?

Answer: Unless there is a divorce setting, an IRA cannot be transferred to anyone, including a spouse. In a divorce setting, IRA’s can be moved between spouses, but not to non-spouses, without triggering income taxes. Therefore, if you and your husband try to transfer portions of your IRA’s to your son, you will be deemed to be assigning income – something you can’t do – and each of you will be taxed on the entire distribution made to your son.

If you and your husband had Roth IRA’s and complied with all of the rules, you could use the same to contribute to your son’s education; however, there are major pitfalls here, including adverse impacts on your son’s efforts to secure financial aid. And, if you withdraw more than you have contributed, you may get a call from the tax man because paying for your son’s education is not a “qualifying event.”

As part of a divorce settlement, your husband can transfer all or part of his IRA to you without incurring tax consequences and without you having to report the income if the funds are rolled over into your IRA. If you receive the IRA directly, however, you will taxed on the entire distribution as income and, depending on your age, may also be assessed with a penalty. Unlike qualified plan benefits such as pensions and 401 (k)’s, IRA transfers are not made pursuant to a Qualified Domestic Relations Order (“QDRO”) but, instead, by trustee-to-trustee transfers from one IRA trustee to another.

On the other hand, Qualified Plan Benefits -- such as pensions and 401k’s -- should only be paid pursuant to QDRO’s, which determine who will be taxed on the distributions from a qualified plan and how the distributions will be made.

While the transfers of IRA’s are comparatively easy, QDRO’s can be complex and time-consuming, and frequently add expense to the divorce because each company has different rules.

The Basic QDRO Requirements include: 1) The name and the last known mailing address of the participant and each alternate payee covered by the order; 2) The amount or percentage of the participant’s benefits to be paid by the plan to you as “alternate payee”, or how to determine the amount or percentage; 3) The number of payments or the period to which the order applies; 4) The plan or plans to which the order applies; 5) Precise instructions about the timing, amount, and method of payment of benefits to you as alternate payee according to the terms of the plan; and 6) When payments may begin. In some instances, a QDRO may require payments to you as alternate payee at your husband’s “earliest retirement age” -- even if your husband, who is called the “participant” – hasn’t yet retired.

Bottom Line: Trying to use Qualified Benefits funds for college costs may well cost more in the long run.