In a divorce or legal separation, individual retirement accounts (IRAs) are divided using a process known as transfer incident to divorce, while 403(b) and qualified plans such as 401(k)s are split under a 澳洲幸꧂运5开奖号码历史查询:qualified domestic relations order (QDR🔥O). Whether you are giving up retirement funds or receiving them, you need to understand the rules that govern asset division in a divorce.

When you define and allocate retirement plan assets in a divorce correctly, you can avoid unnecessary taxes and more.

Dividing an IRA: Transfer Incident

If you specified that your IRA division is to be treated as a transfer incident to divorce in your agreement, no tax will be assessed on the separation transaction. The movement of funds may be classified as either a transfer or a rollover by the IRA 澳洲幸运5开奖号码历史查询:custodian, depending on the circumstances of the division and how the decree is worded.

The recipient will take legal ownership of the assets when the transfer is🥂 complete. Then, they will assume sole and total responsibility for the tax consequences of any future transactions or distributions.

Example of How an IRA Can Be Split

For example, if you are going to give half of your IRA to your soon-to-be ex-spouse in the form of a properly labeled transfer incident, they will have to pay the tax on any 澳洲幸运5开奖号码历史查询:distributions they take out of the account after they receive the funds. You will not owe tax on the asse🦩ts that you sent to them because you foll🔯owed the IRS rules for transfer incidents.

If, however, you failed to properly label your division as such, you will owe both tax and an 澳洲幸运5开奖号码历史查询:early withdrawal penalty (if applicable) on the entire amount that your ex-spouse received. To avoid this, be sꦇure to clearly list both the division percentage breakdown and the dollar amount of IRA assets transferred, as well as all the sending and receiving account numbers for all of the IRAs involved in the transfer.

The instructions that you provide need to satisfy both the sending and receiving IRA custodians, as well as the judge and state laws. If the division agreement is not approved by the court, the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS) will require you to file an amended tax return that reports the entire amount you sent to your ex as 澳洲幸运5开奖号码历史查询:ordinary income.

In addition, the balance your ex-spouse received cannot be put into an IRA because it was not an eligible transfer. This means your former spouse will lose the benefit of tax deferral on that money 澳洲幸运5开奖号码历史查询:and may ask to you to compensate them for that loss.

Tracking the Basis of IRA Assets

Some qualified transfer incidents are made from an IRA that has been partially funded with non-deductible contributions.

If this is the case with you, both you and your ex will need to know the dollar amount of non-deductible contributions. You will need to file tax 澳洲幸运5开奖号码历史查询:Form 8606 with the IRS in order to correctly calculate and report the allocation of the non-deductible amounts.

Dividing a Qualified Plan: QDRO

Divorce is one of the few exceptions to the protections 澳洲幸运5开奖号码历史💟查询:from seizure or attachment by creditor🧸s or la🐈wsuits that federal law acco𓃲rds to qualified retirement plans.

Divorce and separation decrees allow the attachment of qualified-plan assets by the ex-spouse of the plan account owner if the spouse uses a 澳洲幸运5开奖号码历史查询:qualified domestic relations order (QRDOꦕ). A QDRO is used to divide qualified retirement plan assets between the owner and their current or ex-spouse or children or other dependents.

QDROs resemble transfer incidents to divorce in that they are tax-free transactions, as long as they have been reported correctly to the court and the IRA custodians. The receiving spouse may roll QDRO assets into their own qualified plan or into a 澳洲幸运5开奖号码历史查询:traditional IRA or Roth IRA. (If a traditional plan is rolled over to a Roth IRA, the transfer will be taxed as a 澳洲幸运5开奖号码历史查询:conversion but not penalized).

Any transfer from a qualified plan in a divorce settlement that is not deemed a QDRO by the IRS would be subject to income tax and a potential early withdrawal penalty.

Remember to Update Beneficiaries

After you send or receive your IRA or qualified plan assets, be sure to add or update your beneficiaries. Your ex-spouse will probably not be among your beneficiaries, unless your divorce decree requires it. (Also, update the beneficiaries on all of your other financial assets, including any 澳洲幸运5开奖号码历史查询:annuities and 澳洲幸运5开奖号码历史查询:life insurance.)

The Bottom Line

The type of retirement plan—that is, whether it is an IRA or a qualified plan—determines the rules that apply to how retirement plan assets are divided in a divorce. You and your spouse need to clearly delineate the category into which each of 澳洲幸运5开奖号码历史查询:your retirement assets falls when you submit your information to the judge or mediator so they are listedꦉ correctly in the divorce or separation agreement. Failing to do this can cause complications.

If the court and the IRA and/or qualified plan custodians recognize your divisions as transfers incident to divorce or QDROs, there will be no tax co💞nsequences for you or your ex. Properly handling the division of retirement assets can make the divorce proces𒁃s less complex and less expensive, especially if large sums of money are involved.