# 5 - IRAs: Division and transfer incident to divorce.
Monograph # 5
IRAs: DIVISION AND TRANSFER INCIDENT TO DIVORCE
© Lawrence D. Gorin, Attorney at Law, Portland, Oregon
Upon dissolution of marriage, the division between the spouses of an individual retirement account (IRA) by means of a withdrawal or a distribution or a rollover will generally result in tax consequences to the owner of the IRA, including the 10% “early withdrawal” penalty if the account owner is under age 59½.
However, the tax consequences at the time of divorce can be avoided by accomplishing the division of the IRA by a transfer of the IRA as authorized by IRS Code Section 408(d)(6).
26 USC § 408(d)(6). Transfer of IRA incident to divorce:
A “transfer” of an IRA incident to divorce is different from a “rollover,” a “withdrawal” or a “distribution.” When drafting legal documents and when dealing with financial institutions, it is important to use the correct terminology. Failure to do so may result in unanticipated and unwanted consequences.
In sum, 26 USC § 408(d)(6) allows for all or part of an existing IRA to be transferred to the IRA owner’s spouse or former spouse, incident to divorce, without immediate tax consequences to either party, so long as certain requirements are met. Once the transfer is accomplished, the portion of the IRA transferred to the former spouse becomes the former spouse’s own IRA, with the former spouse then being responsible for tax liabilities resulting from future withdrawals from the IRA.
To avoid tax liabilities that would otherwise arise at the time of dissolution in connection with the division of an IRA, 26 USC § 408(d)(6) imposes two basic requirements:
First, there must be a “divorce or separation instrument.” This requirement is satisfied by a judgment of dissolution of marriage, a judgment of legal separation or separate maintenance, or a written instrument incident to such a judgment. The divorce or separation instrument must contain a provision that awards or grants all or part of one spouse’s interest in an existing traditional IRA to the other spouse. The IRA should be specifically identified by name and account number. Suggested language for inclusion in the dissolution judgment is set forth below.
Second, there must be a transfer to the IRA owner’s former spouse of the interest in the IRA (or the portion thereof) as specified in the divorce or separation instrument. (Again, a transfer is not a rollover, withdrawal or distribution, all of which are different from a transfer.)
Two transfer methods
There are two methods for transferring an IRA to a former spouse incident to a divorce. The methods are:
1. Changing the name on the IRA. If the entire IRA is to be transferred, the transfer can be accomplished by simply having the IRA account owner change the name on the IRA from his/her own name into the name of the former spouse. Thereafter, for all purposes, the former spouse is the owner of the IRA.
2. Direct transfer. Under this method, the IRA account owner directs the IRA custodian or trustee (whether a bank, trust company, brokerage firm or insurance company), to transfer a fixed dollar amount or a percentage of the owner’s IRA directly to the trustee or custodian of a new or existing traditional IRA established in the name of the former spouse.
In both situations, once the transfer is complete, the former spouse, i.e., the transferee spouse, is free to then make withdrawals from the IRA, subject to regular income taxation as well as the 10% penalty if the transferee spouse is younger than age 59½.
No QDRO needed for transfer of IRA incident to divorce; however........
The transfer of an IRA incident to divorce does not require the use of a qualified domestic relations order (QDRO). A QDRO, as defined in the Internal Revenue Code at 26 USC § 414(p) and in the Employee Retirement Income Security Act (ERISA) at 29 USC § 1056(d)(3), is required by federal law to implement the court-ordered division of a spouse’s (or former spouse’s) interest in an employer-sponsored qualified retirement plan such as a pension, profit sharing or 401(k) plan. An IRA (being an “individual” arrangement) is not an employer-sponsored qualified retirement plan and is not subject to QDRO requirements.
However, even though federal law does not require the use of a QDRO to accomplish the division and transfer of an IRA incident to divorce, many IRA custodians and trustees nonetheless request and require that a specific court order, separate from the dissolution judgment itself, be submitted as a prerequisite for implementing the IRA transfer. It is not unlawful for an IRA custodian or trustee to impose such a requirement. If done in conjunction with an Oregon dissolution of marriage, the order should appropriately be titled as a Supplemental Judgment (Transfer of IRA Incident to Dissolution of Marriage).
Further, many IRA custodians and trustees require that the account owner’s directive to transfer IRA funds to a former spouse’s IRA be in the form of a “Letter of Instruction” (or similar document), often with the further requirement that the account owner’s signature be “guaranteed” (meaning “gold medallion signature guarantee” by a commercial bank or other authorized securities firm). Some IRA custodians and trustees also require that the former spouse establish an IRA in his or her own name within the same financial institution so that an “internal transfer” can be accomplished. Once done, the former spouse will then be able to direct that a “rollover” be made to some other IRA, if so desired.
The requirements imposed by IRA custodians and trustees are varied and numerous, and sometimes onerous. Also, there is no “standard form” of court order or supplemental judgment for directing the division and transfer of an IRA incident to dissolution of marriage. Practitioners are advised to check with the IRA custodian or trustee to ascertain the specific requirements that the IRA custodian or trustee wants to have satisfied as a prerequisite for implementing the transfer of funds to the account owner’s former spouse. The court order (in the form of a supplemental judgment) should then be drafted accordingly. At a minimum, the supplemental judgment should contain language ordering the IRA owner to execute and furnish to the former spouse such documents as may be specifically required by the IRA custodian or trustee in order to implement the division and transfer of IRA funds to the former spouse.
Suggested language for dissolution judgment
Practitioners may want to consider the following language for inclusion in marital dissolution judgments involving the award and division of IRA interests:
[Alternative # 1] Wife is awarded [insert specific dollar amount, e.g., $24,611, OR a percentage, e.g., 50%] of the account balance from Husband’s Franklin-Templeton Individual Retirement Account (IRA account # 472457-63), as of December 18, 2008, as adjusted so as to account for earnings, losses, interest and dividends thereon, if any, from said date through the date of actual payment, distribution or transfer from said IRA to Wife. Said award shall be implemented by a direct transfer of funds from Husband’s IRA to the custodian or trustee of a new or existing IRA established in Wife’s name, or such other qualified plan, as Wife shall designate.
[Alternative # 2] Wife is awarded $24,611.00 from Husband’s Franklin-Templeton Individual Retirement Account (IRA account # 472457-63). Said award shall be implemented by a direct transfer of said sum, in the full amount stated, from Husband’s IRA to the custodian or trustee of a new or existing IRA established in Wife’s name, or such other qualified plan, as Wife shall designate.
[Further language] To implement this award, Husband shall execute, sign and furnish to Wife such transfer documents and forms, letters of instruction, authorizations and consents, and similar instruments as may be required by the IRA custodian or trustee and/or applicable federal law. The court retains jurisdiction to enter such supplement judgments as may be necessary to effectuate the award hereby made to Wife. Fees and costs incurred by Wife [including attorney fees] for preparation and processing of the instruments needed to implement the foregoing award shall be [paid by Husband] [paid by Wife] [advanced by Wife with Husband to reimburse Wife within 30 after request for such reimbursement] [paid equally by both parties]. [Note: Insert whichever option is desired.]
Additional resources
IRS Publication 504 -- “Divorced or Separated Individuals”
http://www.irs.gov/pub/irs-pdf/p504.pdf
http://www.irs.gov/publications/p504/index.html
IRS Publication 590 -- “Individual Retirement Arrangements (IRAs)”
http://www.irs.gov/pub/irs-pdf/p590.pdf
http://www.irs.gov/publications/p590/index.html
“Dividing IRAs in Divorce” (from National Legal Research Group, Inc.)
http://www.divorcesource.com/research/edj/pensions/01jan1.shtml
=====================================
LAWRENCE D. GORIN
Attorney at Law
521 S.W. Clay St., Suite 205
Portland, Oregon 97201
Phone: 503-224-8884
Fax: 503-226-1321
E-mail: LDGorin@pcez.com
Website: http://ldgorin.justia.net/index.com
IRAs: DIVISION AND TRANSFER INCIDENT TO DIVORCE
© Lawrence D. Gorin, Attorney at Law, Portland, Oregon
Upon dissolution of marriage, the division between the spouses of an individual retirement account (IRA) by means of a withdrawal or a distribution or a rollover will generally result in tax consequences to the owner of the IRA, including the 10% “early withdrawal” penalty if the account owner is under age 59½.
However, the tax consequences at the time of divorce can be avoided by accomplishing the division of the IRA by a transfer of the IRA as authorized by IRS Code Section 408(d)(6).
26 USC § 408(d)(6). Transfer of IRA incident to divorce:
“The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.”
NOTE: Subparagraph (A) of section 26 USC § 71(b)(2) describes a “a divorce or separation instrument” as meaning “a decree of divorce OR * * * a written instrument incident to such a decree.”
A “transfer” of an IRA incident to divorce is different from a “rollover,” a “withdrawal” or a “distribution.” When drafting legal documents and when dealing with financial institutions, it is important to use the correct terminology. Failure to do so may result in unanticipated and unwanted consequences.
In sum, 26 USC § 408(d)(6) allows for all or part of an existing IRA to be transferred to the IRA owner’s spouse or former spouse, incident to divorce, without immediate tax consequences to either party, so long as certain requirements are met. Once the transfer is accomplished, the portion of the IRA transferred to the former spouse becomes the former spouse’s own IRA, with the former spouse then being responsible for tax liabilities resulting from future withdrawals from the IRA.
To avoid tax liabilities that would otherwise arise at the time of dissolution in connection with the division of an IRA, 26 USC § 408(d)(6) imposes two basic requirements:
First, there must be a “divorce or separation instrument.” This requirement is satisfied by a judgment of dissolution of marriage, a judgment of legal separation or separate maintenance, or a written instrument incident to such a judgment. The divorce or separation instrument must contain a provision that awards or grants all or part of one spouse’s interest in an existing traditional IRA to the other spouse. The IRA should be specifically identified by name and account number. Suggested language for inclusion in the dissolution judgment is set forth below.
Second, there must be a transfer to the IRA owner’s former spouse of the interest in the IRA (or the portion thereof) as specified in the divorce or separation instrument. (Again, a transfer is not a rollover, withdrawal or distribution, all of which are different from a transfer.)
Two transfer methods
There are two methods for transferring an IRA to a former spouse incident to a divorce. The methods are:
1. Changing the name on the IRA. If the entire IRA is to be transferred, the transfer can be accomplished by simply having the IRA account owner change the name on the IRA from his/her own name into the name of the former spouse. Thereafter, for all purposes, the former spouse is the owner of the IRA.
2. Direct transfer. Under this method, the IRA account owner directs the IRA custodian or trustee (whether a bank, trust company, brokerage firm or insurance company), to transfer a fixed dollar amount or a percentage of the owner’s IRA directly to the trustee or custodian of a new or existing traditional IRA established in the name of the former spouse.
In both situations, once the transfer is complete, the former spouse, i.e., the transferee spouse, is free to then make withdrawals from the IRA, subject to regular income taxation as well as the 10% penalty if the transferee spouse is younger than age 59½.
No QDRO needed for transfer of IRA incident to divorce; however........
The transfer of an IRA incident to divorce does not require the use of a qualified domestic relations order (QDRO). A QDRO, as defined in the Internal Revenue Code at 26 USC § 414(p) and in the Employee Retirement Income Security Act (ERISA) at 29 USC § 1056(d)(3), is required by federal law to implement the court-ordered division of a spouse’s (or former spouse’s) interest in an employer-sponsored qualified retirement plan such as a pension, profit sharing or 401(k) plan. An IRA (being an “individual” arrangement) is not an employer-sponsored qualified retirement plan and is not subject to QDRO requirements.
However, even though federal law does not require the use of a QDRO to accomplish the division and transfer of an IRA incident to divorce, many IRA custodians and trustees nonetheless request and require that a specific court order, separate from the dissolution judgment itself, be submitted as a prerequisite for implementing the IRA transfer. It is not unlawful for an IRA custodian or trustee to impose such a requirement. If done in conjunction with an Oregon dissolution of marriage, the order should appropriately be titled as a Supplemental Judgment (Transfer of IRA Incident to Dissolution of Marriage).
Further, many IRA custodians and trustees require that the account owner’s directive to transfer IRA funds to a former spouse’s IRA be in the form of a “Letter of Instruction” (or similar document), often with the further requirement that the account owner’s signature be “guaranteed” (meaning “gold medallion signature guarantee” by a commercial bank or other authorized securities firm). Some IRA custodians and trustees also require that the former spouse establish an IRA in his or her own name within the same financial institution so that an “internal transfer” can be accomplished. Once done, the former spouse will then be able to direct that a “rollover” be made to some other IRA, if so desired.
The requirements imposed by IRA custodians and trustees are varied and numerous, and sometimes onerous. Also, there is no “standard form” of court order or supplemental judgment for directing the division and transfer of an IRA incident to dissolution of marriage. Practitioners are advised to check with the IRA custodian or trustee to ascertain the specific requirements that the IRA custodian or trustee wants to have satisfied as a prerequisite for implementing the transfer of funds to the account owner’s former spouse. The court order (in the form of a supplemental judgment) should then be drafted accordingly. At a minimum, the supplemental judgment should contain language ordering the IRA owner to execute and furnish to the former spouse such documents as may be specifically required by the IRA custodian or trustee in order to implement the division and transfer of IRA funds to the former spouse.
Suggested language for dissolution judgment
Practitioners may want to consider the following language for inclusion in marital dissolution judgments involving the award and division of IRA interests:
[Alternative # 1] Wife is awarded [insert specific dollar amount, e.g., $24,611, OR a percentage, e.g., 50%] of the account balance from Husband’s Franklin-Templeton Individual Retirement Account (IRA account # 472457-63), as of December 18, 2008, as adjusted so as to account for earnings, losses, interest and dividends thereon, if any, from said date through the date of actual payment, distribution or transfer from said IRA to Wife. Said award shall be implemented by a direct transfer of funds from Husband’s IRA to the custodian or trustee of a new or existing IRA established in Wife’s name, or such other qualified plan, as Wife shall designate.
[Alternative # 2] Wife is awarded $24,611.00 from Husband’s Franklin-Templeton Individual Retirement Account (IRA account # 472457-63). Said award shall be implemented by a direct transfer of said sum, in the full amount stated, from Husband’s IRA to the custodian or trustee of a new or existing IRA established in Wife’s name, or such other qualified plan, as Wife shall designate.
[Further language] To implement this award, Husband shall execute, sign and furnish to Wife such transfer documents and forms, letters of instruction, authorizations and consents, and similar instruments as may be required by the IRA custodian or trustee and/or applicable federal law. The court retains jurisdiction to enter such supplement judgments as may be necessary to effectuate the award hereby made to Wife. Fees and costs incurred by Wife [including attorney fees] for preparation and processing of the instruments needed to implement the foregoing award shall be [paid by Husband] [paid by Wife] [advanced by Wife with Husband to reimburse Wife within 30 after request for such reimbursement] [paid equally by both parties]. [Note: Insert whichever option is desired.]
Additional resources
IRS Publication 504 -- “Divorced or Separated Individuals”
http://www.irs.gov/pub/irs-pdf/p504.pdf
http://www.irs.gov/publications/p504/index.html
IRS Publication 590 -- “Individual Retirement Arrangements (IRAs)”
http://www.irs.gov/pub/irs-pdf/p590.pdf
http://www.irs.gov/publications/p590/index.html
“Dividing IRAs in Divorce” (from National Legal Research Group, Inc.)
http://www.divorcesource.com/research/edj/pensions/01jan1.shtml
=====================================
LAWRENCE D. GORIN
Attorney at Law
521 S.W. Clay St., Suite 205
Portland, Oregon 97201
Phone: 503-224-8884
Fax: 503-226-1321
E-mail: LDGorin@pcez.com
Website: http://ldgorin.justia.net/index.com