Often when you get divorced Individual Retirement Accounts (IRAs) can be one your most important assets both emotionally and financially. Unfortunately, it is common for these assets to be divided at the last minute in settlement, and in doing so attorneys can omit important details from the Marital Settlement Agreement (MSA) regarding division of these assets and in the rush to settlement fail to provide details in the closing letter to the party(ies) regarding the process or next steps in assignment of these monies.
In divorce it is typical to assign two types of IRAs: Conventional Pre-tax IRA Accounts and Roth (post-tax) IRA Accounts. Arguably Roth Accounts are worth more in assignment as the taxes have already been paid and they do not need to be tax affected on the balance sheet. Both IRA types can be assigned without tax consequences incident to divorce pursuant to IRC Section 408(d)(6) and should not require a Qualified Domestic Relations Order to effectuate assignment.
Like other types of retirement accounts that fluctuate daily with the markets (unless the IRA is only invested in cash) the balance of the IRA account on the day of dissolution will be valued at a different amount then at the day it will be potentially assigned. Some custodians are willing to calculate these fluctuations, and some find this administratively burdensome. This is something the parties should consider and be aware of in their negotiations and understand the potential risk for the payor and payee.
Since an IRA is a custodial account, all that should be required for assignment to an alternate payee (former spouse) is a letter of direction or in many cases some paperwork/forms provided by the custodian. In the settlement agreement or letter of direction the following language should be made clear and available so that the custodian is aware that a tax-free assignment pursuant to the Code is being directed “This transfer of funds shall occur in accordance with section 408(d)(6) of the Internal Revenue Code, with the roll-over of funds being effectuated as a transfer between divorced spouses.”
Often the custodian of the IRA will have their own forms which you can request (or are sometimes) available online that will help effectuate the assignment pursuant to the MSA. Occasionally a custodian will request a Qualified Domestic Relations Order (QDRO) even though IRAs do not technically fall under the QDRO requirements of Code section 414p as they are not employer sponsored benefit plans. If a QDRO is requested it could be for a couple of reasons: 1) the custodian is just not aware that Code Section 414p does not apply to IRAs and a little bit of collegial education is required(nicely) 2) the MSA was not drafted with robust 408(d)(6) language so the custodian needs a supplemental order 3) or the Payee would like to take a cash distribution and waive the 10% penalty under age 59.5 and the only way to do this is to see if the custodian will accept a QDRO to waive said penalties.
Some foresight and research and a clear understanding of the IRA plan procedures, as well as the parties’ intent will go a long way to a smooth disbursement post-decree. Please contact The Law Offices of Anne Schmidt, LLC if our office can be of assistance to you. www.anneschmidtlaw.com