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How to divide your IRA during divorce

If you are considering divorce, you might be stressing about what will happen to your retirement accounts. It is important to understand how Individual Retirement Accounts are divided so you can anticipate the tax implications. Dividing these complex assets requires careful consideration, so here is a guide to the process. 

Agreement and court approval

First of all, you and your spouse will need to agree to divide the IRA account and obtain a court order to start the process, called “transfer incident to divorce.” Specifying this in your agreement is crucial to avoiding tax assessments. Depending on your particular circumstances, the IRA custodian will consider the movement of funds a rollover or transfer. If you fail to follow these rules, you may owe taxes and a potential early withdrawal penalty.

Recipient ownership

Once the transfer is complete, the recipient assumes ownership of the assets, including responsibility for tax consequences of future transactions. For example, if you are giving your spouse half of your IRA in a transfer incident, she will pay taxes on distributions after she receives your funds.

Track IRA assets

If your IRA is partially funded with nondeductible contributions, you and your spouse need to determine the dollar amount of these contributions and submit Form 8606 to the IRS. You might want to seek professional guidance when filling out this form to avoid paying unnecessary taxes.

Beneficiary updates

Once the transfer is complete, update your beneficiary designations. At this point, your ex is unlikely to be a beneficiary unless the divorce decree specifies this. If your children are going to be the primary beneficiaries or you get remarried, you might consider opening a revocable living trust to manage your assets actively.

When you correctly follow the rules for transferring your IRA, you can avoid tax consequences. For more counsel on properly dividing your retirement plan, consult a divorce attorney.

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