IRA Transfers Upon Divorce

In connection with a divorce, an Individual Retirement Account (IRA) owner may be required to convey all or part of his or her interest in the IRA to the ex-spouse. Internal Revenue Code Section 408(d)(6) contains special tax rules which are designed to avoid taxes to either spouse on the transfer.

For the special rules to apply, the transfer must be pursuant to a divorce decree or a written instrument (i.e., a property settlement) incident to the divorce. Since IRAs are not qualified retirement plans, a Qualified Domestic Relations Order (QDRO) is not required to transfer an IRA between spouses.

Several alternatives exist for accomplishing the transfer of the individual’s interest in an IRA. The parties may execute a separate document assigning the transferring spouse’s ownership rights in the account or annuity to his or her ex-spouse. If the assets are held in a single IRA, the IRA owner can withdraw the assets to be transferred and roll them over to a second IRA, then assign ownership in the second IRA to the ex-spouse. Alternatively, an IRA owner may arrange for a direct transfer of assets from the account’s trustee, custodian, or annuity issuer to the sponsor of an IRA already established and owned by the ex-spouse.

The divorce transfer rules provide an interesting alternative to QDROs when dividing an individual’s interest in a qualified plan. If circumstances (such as an uncooperative plan administrator) are preventing or complicating use of a QDRO, the transferring party may be able to arrange a distribution of the desired assets from the qualified plan into an IRA without tax consequences. Once in the IRA, an interest in the assets can easily be transferred to the ex-spouse following the rules in Code Section 408(d)(6). Since retirement plans often prohibit distributions before retirement age or termination of service, the transferring individual should check as to whether such prohibitions exist and, if so, whether the plan can be amended to allow the circumstances needed to distribute the assets out of the plan and into an IRA.