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Divorce 101: Splitting IRAs

Posted by Keith on June 17, 2007 at 4:42 am  

Keith,

In a divorce how are the IRA’s dealt with? They are all in my name. My wife had no earned income. Do they have to be sold and then renamed. What is the best way to handle them with the least tax consequences?

Jim


JIM,

Generally, each spouse is entitled to half of whatever the other contributed to their retirement accounts, plus (or less) what those contributions grew to (or fell to) during the marriage .

This is resolved on a tax-free basis through a a Qualified Domestic Relations Order, known as a “QDRO”. The court must sign off on the agreement in the form of an order. Then the parties can take the order to the custodians of each qualified account and demand that the account be subdivided into another tax-deferred account pursuant to the order.

However, it is by no means assured that the division of these accounts will be equal. First, whatever either spouse contributed to their qualified retirement accounts prior to the marriage, or after they signed a formal separation agreement but prior to their actual divorce, plus what those amounts have grown to, should not be subject to the claims of the other spouse.

Should” is the operative word. Domestic relations courts generally regard themselves as courts of “equity”, rather than of “law”. That’s bunk for “the judge may do whatever he/she thinks is ‘fair”. If kids are involved, or if your spouse has a great pitch about all the economic opportunities she missed during the marriage, hold on to your wallet.

Good luck, Jim. My best advice is to ALWAYS be represented by competent divorce counsel. The operative word here is “competent.” Actually ask for client referrals, and call those people. Seriously. An incompetent or uncaring divorce attorney can make divorce a much more difficult — and expensive — experience than necessary.

–Keith


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