Tracy Stewart
Tracy Stewart
Tips on Dividing IRAs in a Divorce

Although dividing an IRA in a divorce may seem like a simple task, there are some important nuances to keep in mind.

July 23, 2009
by Tracy Stewart, CPA, PFS

Although transferring or dividing a traditional or a Roth IRA incident to a divorce does not require a Qualified Domestic Relations Order (QDRO) and may appear to be simple, it still requires some care. If not done correctly, the account owner or transferor (not the transferee) will pay unnecessary taxes and penalties.

When one spouse transfers an individual retirement account (IRA) or a portion of an IRA to a spouse or former spouse under a divorce decree or under a written instrument incident to a divorce, that transfer is not considered a distribution to the owner of the IRA. The Internal Revenue Service (IRS) has also ruled that entering into a post-nuptial agreement that provides for the distribution of an IRA in the event of a divorce is not treated as a distribution.

In any of these cases, the transferred IRA is considered to belong to the recipient spouse and not to the original owner. This means that the recipient is not required to take distributions from the IRA after he/she receives it even if the original owner spouse was taking distributions as part of a series of substantially equal periodic payments.

Any transfer of an IRA to an ex-spouse should be made after the divorce is final. If the account owner transfers part or all of an IRA before the divorce is final, he/she could be taxed on the distribution and possibly incur a 10-percent early-distribution penalty.

Although transfers incident to divorce are tax-free, a transfer cannot be incident to the divorce until after the divorce has taken place. After the divorce, the account owner should transfer an IRA in a timely manner. If a divorce decree does not address the division of an IRA, then a transfer to the ex-spouse will be considered a taxable distribution to the account owner if transferred more than one year after the date of divorce.

An IRA transfer should be done via direct transfer (trustee-to-trustee). If the account owner takes a distribution from the IRA in the form of a check to the ex-spouse, that account owner will be taxed on that distribution. Additionally, the recipient spouse will lose the ability to grow the funds tax deferred in an IRA account. Therefore, the distribution should never be in the form of a check payable to a person.

Whether an IRA is transferred in its entirety to the non-account-holder or divided between the two parties, there are two methods of transferring the non-account-holder's portion:

  • Keep the name on the original account or
  • Change the name on the original account.

In the following examples, the wife is the original account owner and the husband is the transferee.

Keep Name on Original Account If 100 percent of the account is being transferred to the husband, he sets up a new, temporary IRA account at the same custodian company to receive the transfer. If the IRA is being divided, the husband's portion must be transferred to his new IRA account, leaving the wife's portion in her original account. Once the transfer is made, he would transfer the funds from the temporary custodian account to a new IRA account with the custodian of his choice. If he wants to keep the IRA with the first custodian, then, of course, there would be no need to establish a second IRA account with a different custodian. This is the most common method of transferring.

Change Name on Original Account If 100 percent of the account is being transferred to the husband, then the name on the existing account can simply be changed to that of the husband. If the IRA is being divided, the wife can transfer her portion to a new IRA account, leaving the husband's share in the original account. The name on the original account can then be changed to that of the husband. This method tends to give the original account-owner more control over the transfer.

When part or all of an IRA is transferred, the transferee is treated as the original account owner for his portion. For example, he keeps the original tax basis of his portion as his own basis. It is important for him to have copies of the applicable records of the original account.

If spouses are dividing property using an offsetting method, they may be trading certain marital property. For example, one spouse may keep the IRA, while the other spouse keeps the house. Or the spouses may be trading traditional IRAs with ROTH IRAs. When trading assets of differing form, it is important to look at the after-tax effects. Two assets may appear to be of equal value, but they may be significantly unequal when income taxes are taken into account. Unfortunately, calculating the tax effect on an IRA is not as straightforward as it may appear. The exercise requires several assumptions as well as a crystal ball. The younger the IRA account owner, the more precarious the tax-effect calculation. A few issues to be considered in the calculation include type of IRAs, anticipated tax rates, tax law changes, income sources, income level, deductions and filing status. In the example of the residence traded for the IRA, the home sale may occur in the short run while IRA distributions may be expected to occur decades later.


Whether or not there have been any transfers of IRA funds, after the divorce each ex-spouse should be sure to update beneficiary designations with their IRA custodians. Of course, ex-spouses should also update their entire estate plan. Outdated beneficiary designations can result in unintended heirs.

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Tracy B. Stewart, CPA, PFP, CFP, CDFA specializes in family law litigation support in Houston, TX. She helps clients protect their wealth during property settlement negotiations. She is a member of the AICPA Personal Financial Planning and the Forensic and Valuation Services sections. Stewart is a board trustee for the Collaborative Law Institute of Texas as well as on the Executive Board of Texas Society of CPAs. You can contact her through www.texasdivorcecpa.com.