15 Oct Is there a tax consequence to splitting an IRA in divorce?

Q. One of my family members just divorced. The court asked him to give half of his IRA to his wife as part of asset settlement. Within three days, he withdrew half of his IRA and deposited it in his own personal account and then transferred that amount to his ex-wife’s IRA. How does he report this transaction so that he does not have to pay taxes?
— Trying to help

A. There are provisions under which a transfer because of a divorce would be without tax consequences.

But you have to make sure to do it right.

The matrimonial attorney representing your family member may not have given clear instructions on how to split up the IRA, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

“A provision of the Internal Revenue Code provides tax-free treatment if a transfer of an interest in an IRA is pursuant to a divorce decree,” he said. “The amount transferred is not considered a distribution to either the IRA owner or the ex-spouse.”

The transfer can take the form of executing a separate document that assigns the IRA owner’s ownership rights in the account to the ex-spouse, he said.

Or, if the assets are held in a single IRA, the IRA owner might withdraw the portion of those assets that are to go to the ex-spouse and then roll them over to a second IRA. Ownership in the second IRA then could be assigned to the ex-spouse, he said.

Or a court order might call for a direct transfer of assets from the trustee sponsoring the IRA owner’s IRA to the sponsor of an IRA in the name of the ex-spouse, Becourtney said.

“The matrimonial attorney should be asked if the three days that the IRA was held personally by your relative invalidates the tax-free transfer treatment incident to divorce,” Becourtney said. “Assuming the answer is yes, if 60 days have not passed since the withdrawal occurred, the IRA can be rolled back. Then it can subsequently be transferred directly to the ex-spouse’s IRA to achieve a tax-free result.”

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This story was originally published on Oct. 15, 2021.

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