You and your spouse have contributed to your IRA throughout the course of your marriage, planning to spend your golden years together. Now that you’re divorcing, you are both entitled to part of that money. You may be wondering about avoiding the tax penalty imposed when you take the money out before age 59.5.
Learn more about avoiding tax penalties when splitting your IRA, and to discuss your divorce claim in greater detail, call Coumanis & York at 251-990-3083.
Splitting Your IRA During Divorce
An IRA is a tax-deferred account. If you withdraw from it before age 59.5, you must pay a 10% penalty. Unfortunately, it’s not always up to you whether or not you access your IRA early. If you divorce, you don’t necessarily get a choice to divide or not divide the account. The IRS does allow you to split your IRA without incurring an unnecessary penalty.
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.
Rolling Over Your Ex-Spouse’s Portion
You can go about this in one of two ways. You can roll your ex-partner’s portion into their existing IRA account or into a new IRA account they open for this specific purpose. When money moves directly from an IRA in your name to an IRA in their name, there are no penalties incurred by either party.
If your ex-partner does not have an IRA account and does not want to open one at the present moment, you can have their portion transferred to a checking or savings account.
If Your Ex-Spouse Does Not Move Their Portion into a Retirement Plan
You may worry about incurring a penalty if your ex-spouse has their part of the IRA rolled into a checking account, rather than another IRA. However, they have 60 days after the money is deposited to move it into a retirement amount of their choosing. If they do not transfer it in 60 days, it is taxed as regular income. If they are not 59.5 or older at that point, they must pay a 10% penalty. You do not have to pay any penalty.
There are some circumstances in which the 10% penalty is not assessed, including:
- If the partner receiving the money is disabled
- If the money is used for tuition for the recipient or one of their dependents
- If they use up to $10,000 of it for a down payment on a home
If one of these circumstances applies, they will still need to pay regular income taxes on the money.
Handling Retirement Accounts and Other Divorce Issues
This issue highlights the importance of having a reliable and experienced divorce attorney. Attempting to negotiate and handle these issues on your own can be costly, both in terms of giving up more than you need to and accidentally setting yourself up for unexpected tax consequences.
Some people attempt to DIY their own divorce case to save money and avoid a contentious divorce. However, hiring an attorney isn’t only for adversarial or contested divorces. An attorney helps you avoid unintended consequences of property division, child support, and child custody agreements. Even when both parties are on the same side and agree on the basics of the divorce case, it is crucial to have your agreement looked over by an attorney who represents your best interests.
Get the Support You Need from Coumanis & York
Whether you’re just getting started in the divorce process or you’re just evaluating your options, it’s never too early to consult a divorce attorney and start making a plan. We can help you navigate this difficult time and plan for your future. To get started, give our team a call at 251-990-3083 or reach out to us online. We look forward to helping you.