Dealing with IRAs in a divorce.

• Author: Burdette, Robert S.
• Position: Individual retirement accounts

While divorce is certainly a part of American society, there is still a question of whether the tax law on divorce has kept up, especially as it relates to the division of individual retirement accounts (IRAs) and other retirement plans.

Qualified domestic relations orders (QDROs) apply to qualified retirement plans. By this means a pension or profit-sharing plan can be split between spouses without tax or penalty. The receiving spouse steps into the position of the participant spouse without currently taxing either party. Even if this division of the retirement account is done before age 59 1/2, there is no penalty on the division of one plan to another owner/beneficiary. An IRA is not a qualified retirement plan; it therefore is not afforded this QDRO protection.

Under Sec. 408(d)(6), however, the owner of the IRA can surrender all or part of his IRA to a spouse incident to a divorce and avoid current tax and penalty. To get this benefit, a taxpayer must surrender his IRA pursuant to a divorce decree or a written instrument incident to the divorce (such as a property settlement).

Sometimes a qualified retirement plan allows for in-service distributions. When a distribution is available, a QDRO may be detained by an uncooperative plan administrator or a divorce court judge. If the qualified retirement plan allows for in-service distributions, a plan participant may transfer his interest directly to an IRA and then make the necessary split in the account assets to each spouse. This transfer can be done in any of several ways. The owner of the retirement plan may transfer into an IRA just the amount he needs to give to the spouse; this new IRA can then be given to the spouse in its entirety. The owner of the retirement plan may also transfer all of his retirement benefits into one IRA; this IRA can then be split into two IRAs, with the respective spouse's name on the portion each is to receive. Another method is to transfer the retirement...