Dividing IRA accounts in a divorce can be complex

Married couples over the age of 50 in Georgia and around the country are divorcing in far higher numbers today than they did in years past. Property division negotiations in a gray divorce are often difficult because older couples usually have significant marital estates that have been built diligently over several decades, and deciding how to deal with retirement assets like 401(k) and IRA accounts can be especially challenging. This is because the tax laws have been written to discourage people under the age of 59 1/2 from accessing these funds.

Younger individuals who withdraw funds from IRA accounts must pay income tax on the money and a 10% penalty, but exceptions are made when the withdrawn funds are used to pay education expenses or health care bills or to purchase a first home. The penalty is also avoided when IRA account holders opt for early retirement and make regular withdrawals for five years or longer. Early retirement withdrawals are known as 72(t) distributions. However, the tax code makes clear that the 10% penalty will be applied retroactively and an additional late interest penalty must be paid if 72(t) distributions cease or IRA funds are transferred.

This would make transferring IRA funds in a gray divorce extremely expensive if 72(t) distributions are being made. However, the IRS has made exceptions for divorcing couples by issuing private letter rulings. Taxpayers who wish to obtain one can expect to wait at least a year and pay as much as $10,000, but most experts say that a ruling is not required in a gray divorce because the IRS has already issued several PLRs addressing the issue.

The decisions made during property division negotiations can have profound consequences, and this is particularly true when complex assets like retirement accounts, business interests and investment portfolios are involved. In these situations, experienced family law attorneys may ask experts like investment consultants and retirement planners to explain the options divorcing clients have and their possible ramifications. This could help them to avoid financial pitfalls and make more prudent decisions.

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