cash an ira during a divorce

Can an IRA Be Cashed Out During a Divorce?

The more assets you have, the more complicated your divorce may become. This is especially true when it comes to retirement funds as these are strictly regulated by the federal government. It’s not enough to simply come to an agreement with your ex-partner, withdraw the money, and hand it over to them—going this route could leave you with heavy penalties and taxes. Make sure you know what you can and cannot do before you touch your retirement accounts during divorce.

Looking for more personalized advice as you work through your divorce? Turn to the team at Coumanis & York. Call us at 251-990-3083 to schedule a consultation now.

Changes in Alabama Law

You may have heard that you don’t have to worry about losing your retirement accounts in divorce unless your marriage lasted at least 10 years. This is outdated advice. In 2017, the state changed the law and gave judges full discretion in the division of retirement funds. Even if your marriage only lasted a year, retirement accounts can be split up. Now, retirement accounts are treated the same as any other marital asset. This doesn’t mean, though, that you’ll lose half of your retirement accounts.

Cashing Out to Pay for Divorce

If you do not have much in the way of liquid assets, you may be considering tapping into your retirement funds to pay for your divorce. Please note that this should be a last resort for you. While you can take money from your IRA to cover your divorce expenses, it will be considered an early withdrawal if you are not at least 59 1/2 years old. You will need to pay taxes on the amount you withdraw, as well as a 10% penalty tax for premature distributions.

Additionally, if your IRA is considered a joint asset in the divorce, this can complicate the division of assets. The court will look at your withdrawal as using joint assets to cover your divorce fees. You may have to pay your ex-partner a larger share of the IRA to make up for the amount you took in the early withdrawal.

If at all possible, try to find another way to cover your divorce expenses that doesn’t involve taxes and a 10% penalty.

Transferring to Your Spouse

Many divorce agreements include specific information about what will happen to both spouses’ retirement accounts. If your divorce agreement requires you to transfer some or all of your IRA to your ex-partner, make sure you go about it the right way. If you simply withdraw the amount that they’re owed and give it to them in cash, you’ll pay the taxes on the early withdrawal plus the 10% penalty. Your ex-partner will pay no taxes on the amount you give them.

To avoid this, make sure the transfer is specifically outlined in the divorce decree. You will need a QDRO, or a Qualified Domestic Relations Order, to transfer IRA funds without taxes or early penalties. Please note that a temporary alimony or support order is not a QDRO and would leave you subject to taxes and penalties.

Include it in Your Property Settlement

To avoid the penalty, the division of the IRA settlement must be included in your divorce decree or settlement agreement. This is not something you can do under the table—it must all be specifically laid out in your agreement. The settlement must include the amount you are transferring to your ex-spouse if you are not transferring the entire amount to them. It must also lay out which account you are transferring the money to and the financial institution.

Follow Your Divorce Agreement to the Letter

A trustee-to-trustee transfer may be the safest and easiest way to transfer your IRA funds to your ex-partner. This involves having the IRA trustee transfer money from your IRA into the ex-spouse’s IRA. Otherwise, the spouse transferring the money can roll funds over into a new account and then assign ownership to the ex-partner.

Once the appropriate amount is transferred to your ex-spouse, the transferred money is legally considered theirs and they can do whatever they want with it. If they choose to withdraw early, they would be responsible for the taxes and early withdrawal penalties that would come with it.

Avoiding Unnecessary Fees and Penalties

Retirement funds are a complicated topic in divorce law, which is why it’s important to have an attorney assisting you throughout this process. If you attempt to DIY a divorce settlement, you risk making costly errors that could cost you or your ex-partner thousands of dollars.

Not only will you need assistance with your retirement account transfers, but you’ll need to consider the tax implications of other asset transfers. The assets you choose to give up and the way you transfer them to an ex-partner can have a significant impact on your finances, so it is crucial to make sure your bases are covered by hiring a family law attorney.

Discuss Your Options with Coumanis & York

When you have Coumanis & York working with you on your divorce, you can rest easy knowing that your case is in good hands. To find out more about how we can help you, get in touch online or call us at 251-990-3083.

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