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Properly dividing IRAs in divorce cases

On Behalf of | Jun 3, 2021 | Blog, Divorce

Married couples in New York who have individual retirement accounts may be required to divide them with their spouses when they get divorced. People who are entitled to receive a portion of their spouses’ IRAs will need to make sure they are transferred correctly to avoid potential tax consequences.

Tax-free IRA transfers

Transfers of IRA funds between spouses because of a divorce will be tax-free if certain conditions are met. To qualify as a tax-free transfer, it must be explicitly included in the property settlement or divorce decree. When the funds are transferred, they must also be transferred directly from the account holder’s IRA to a new IRA established in the receiving spouse’s name. If a spouse simply withdraws the money and gives it directly to the other spouse, the account holder will have to pay income taxes on the withdrawn amount and a 10% penalty if he or she is younger than age 59 1/2.

If the receiving spouse receives the funds instead of them being directly transferred into the IRA account, he or she will need to roll them over into an IRA within 60 days. However, 20% of the total amount will be withheld for taxes by the IRS. Even if the funds are transferred directly to a new IRA, the spouse receiving the funds will still need to pay taxes at the time he or she withdraws the money in the future.

Dividing IRAs and other types of retirement accounts in divorces must be done properly to avoid tax penalties. Withdrawing the money incorrectly can also force the account holder into a higher tax bracket since the withdrawn funds will be counted as income and added to his or her income for the year for tax purposes. People who are preparing to divorce and who have IRAs might want to get help from an experienced divorce lawyer to ensure that the funds are divided correctly to avoid the tax liabilities.