January 22, 2020

How Distributions From an IRA Can Be Affected by Divorce

Divorce is on the rise for older adults in Michigan and nationwide, and this can mean that they have accumulated a substantial amount of retirement savings. There are regulations around dividing retirement accounts in the process. In some cases, a document called a qualified domestic relations order is required. This is not necessary for an IRA, which only requires a divorce decree.

However, some people may have begun taking 72(t) distributions from the account before the age of 59 1/2. While there are situations in which this is permitted without triggering the 10% penalty for an early withdrawal, a modification can mean the person has to pay the penalty on all the distributions. What is not clear is whether splitting the account in a divorce counts as a modification.

Although it appears to be one based on IRS definitions, some taxpayers have sought further guidance from the IRS with a private letter ruling. These can be expensive and may take a year or more, so most people do not pursue them. When the IRS does release them, they are made public, but they are only supposed to apply to the individual taxpayer’s situation. However, IRS rulings in PLRs appear to be consistent and do not consider the split a modification although individuals may still want to consult a financial professional.

Property division can be a complex and stressful process, but people might be able to negotiate an agreement without having to go to court. Among the other issues they may need to consider is what to do about a family home and how to divide a business owned by one or both people. An attorney can provide a client with guidance on these and other matters.