Dividing IRAs in Divorce: Do You Need a QDRO?

Written October 25th, 2012
Categories: General QDRO Info, IRA

What is an IRA?

IRAs are Individual Retirement Accounts which are governed by Internal Revenue Code §408.  Usually the account owner is the person in control of the IRA, and the account owner is considered the “plan administrator.”  The most common type of IRA is the traditional IRA; however, there are also simplified employee pension (SEP) IRAs, savings incentive match plan for employees (SIMPLE) IRAs, education IRAs, and Roth IRAs.  Contributions made to an IRA during marriage (from the date of marriage through the date of separation) are considered community property in California and are subject to division due to dissolution of marriage.

Do You Need a QDRO to Divide an IRA?

Usually you do not need a QDRO to divide an IRA, but each IRA is different and it is best to call the company who manages the IRA to see if they require a QDRO before the account is divided.  Typically an IRA may be divided by a “divorce or separation instrument” as defined in Internal Revenue Code (IRC) §71(b)(2)(A) and pursuant to IRC §408(d)(6).  The following are considered “divorce or separation instruments”:

  • A decree of divorce or separate maintenance or a written instrument incident to such decreeIRA and divorce
  • A written separation agreement
  • A decree requiring a spouse to make payments for the support or maintenance of the other spouse

In order to utilize a “divorce or separation instrument” to divide and IRA, you should be sure that your judgment or settlement agreement includes language that is sufficient to divide the IRA, provides a clear method of division, provides a valuation date as of which the IRA is to be divided, and address gains and losses on the non-owner spouse’s share.

Rather than a judgment or filed settlement agreement, some financial institutions will require a “Letter of Instruction,” signed by the IRA owner, directing them to divide the account.  Occasionally, a financial institution will require a “QDRO” before dividing the account on behalf of the non-owner spouse.  Although IRAs are not governed by ERISA, and are exempt from ERISA’s QDRO provisions, it is usually best to simply provide the financial institution with whatever documentation they require in order to divide the account, whether it is a judgment, settlement agreement, letter of instruction or QDRO.

To divide an IRA you do not need obtain a joinder, as you may need to do with other types of retirement benefits, because the person who legally owns and controls the account is the spouse who is a party to the divorce action, not a third party plan administrator.

Tax Issues with IRAs and Divorce

To be tax free, the IRA transfer to the other spouse must made be pursuant to a court order.  Further, money should be transferred directly from one IRA to another IRA or plan via either i) direct rollover distribution or ii) trustee-to-trustee transfer.  Failure to utilize these methods of transfer can result in a mandatory 20% IRS tax withholding.  If money is first distributed to an individual and is then rolled over within 60 days of distribution to an IRA or other plan, tax-deferred treatment is possible, but will only apply to 80% of the distribution unless the individual can contribute funds to make up for the 20% that was withheld.  Funds received directly by an individual who is not yet 59 ½ will be subject to a 10% early withdrawal penalty; however, this early withdrawal penalty can sometimes be waived by utilizing a QDRO. [IRC §72(t)]

Need Help Dividing an IRA Due to Divorce?

Call QDRO Helper today at 619-786-7376 if you need help dividing and IRA due to divorce.  We can prepare a QDRO if one is required.  We also can help draft language for your divorce decree or settlement agreement that will allow the IRA to be divided.  You can also email info@qdrohelper.com for more information and for our Fee Schedule.  We are happy to assist clients throughout California – no in-office appointments needed.

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