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Splitting an IRA in a divorce

Although the divorce rate is on the decline overall for couples in Illinois and around the country, divorce among older adults is on the rise. This age group may have retirement accounts to divide, and they might also be more likely to have started taking distributions from those retirement accounts despite not reaching the age of 59 1/2.

To divide certain types of retirement accounts in divorce, a document called a "qualified domestic relations order" is necessary, but for an IRA, a divorce decree is sufficient. However, IRS regulations are not entirely clear about whether this is considered a modification if the person is getting distributions before turning 59 1/2. There are limited circumstances in which getting these distributions does not trigger the 10% penalty, but a modification will require the receiver of the distributions to pay this penalty retroactively.

Since there is nothing specific about divorce in IRS regulations, some people have sought a private letter ruling. This gives the IRS the opportunity to make a judgment about a specific case, but it is so costly that it is out of reach for many people. However, when PLRs are consistent, as they have been in this case, it is possible to make an inference, and these PLRs seem to indicate that a divorce split is not a modification.

Divorce does not always mean that a couple will have to go to family law court to determine property division. Many couples prefer to negotiate an agreement outside of court because it can be less stressful and expensive. Some may decide that instead of splitting their property, each will take certain assets. For example, one person might take a savings account while the other might take the retirement account if they have a similar value once taxes and other associated costs are taken into consideration.

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