Can My Spouse Get My IRA in a Divorce?

An Individual Retirement Arrangement (IRA) is often one of the most significant assets a couple accumulates. During a divorce, these accounts are subject to division. State laws and financial regulations govern how an IRA is split, treating it as property that may belong to both spouses. The process involves specific legal and financial steps to ensure the asset is divided correctly and without unintended tax consequences.

Determining the Marital Portion of an IRA

The division of an IRA in a divorce begins with the distinction between marital and separate property. Marital property includes all assets acquired by either spouse from the date of marriage until separation. For an IRA, this means contributions made during the marriage and any investment returns earned on those marital contributions are considered marital funds.

Separate property consists of assets owned by one spouse before the marriage. The value of an IRA on the wedding date is classified as separate property. This protection also extends to assets like an inheritance or a gift, provided those funds were deposited into the IRA and kept identifiably separate from marital funds.

Commingling is the mixing of separate and marital assets. If a spouse deposits an inheritance into the same IRA that has been funded with marital contributions, the entire account may become reclassified as marital property. Without records tracing the separate funds, it becomes difficult to prove which portion should be excluded from division.

The division of the marital portion is dictated by state law, which follows one of two models: community property or equitable distribution. In community property states, marital assets are typically divided 50/50. In equitable distribution states, the division is based on what a court deems fair, which may not be an equal split, and factors like the length of the marriage can influence the allocation.

Required Documentation for Division

The foundational document is the divorce decree or a settlement agreement that is incorporated into the final decree by the court. This legal order compels the financial institution holding the IRA, known as the custodian, to split the account. The language within this document must be clear to prevent delays or rejection.

For the IRA custodian to act, the divorce decree must explicitly identify the IRA, including the full account number and the name of the institution. It must also state the exact dollar amount or the specific percentage of the account to be transferred to the other spouse. A statement that the transfer is “incident to divorce” must be included, which signals the legal and tax context of the transaction.

Beyond the court order, the IRA custodian will have its own required forms. These are often titled “Transfer Incident to Divorce Request” and can be found on the custodian’s website or obtained by contacting them. This paperwork serves as the instruction for the financial institution to complete the transaction.

Completing the custodian’s forms involves transcribing the details from the divorce decree, such as the amount to be transferred and the receiving spouse’s information. The receiving spouse will need to have their own IRA ready to accept the funds. This means providing the account number of the new or existing IRA into which the assets will be moved.

The IRA Transfer Process

With all documentation prepared, the next phase is the transfer of assets. The process is designed to move funds between retirement accounts without either party taking possession of the money. The account holder submits the completed custodian forms along with a certified copy of the relevant pages from the divorce decree to their financial institution.

The required method for moving the funds is a direct trustee-to-trustee transfer. In this transaction, the custodian of the original IRA sends the specified amount directly to the custodian of the receiving spouse’s IRA. The original account owner must not withdraw the funds to pay their ex-spouse in cash, as doing so would negate the special treatment for divorce-related transfers.

It is important to distinguish this process from the one used for employer-sponsored retirement plans like 401(k)s and pensions. These plans require a specific court order called a Qualified Domestic Relations Order (QDRO) to be divided. A QDRO does not apply to IRAs, and attempting to use one will be rejected by the custodian.

Once the paperwork is approved, the custodian executes the transfer. The funds should appear in the receiving spouse’s IRA within several business days.

Tax Consequences of an IRA Division

The tax implications of dividing an IRA depend on whether the process is handled correctly. When the division is executed as a proper transfer incident to divorce, as outlined in Internal Revenue Code Section 408, it is a non-taxable event. The original account owner does not owe income tax on the funds being transferred, and the 10% early withdrawal penalty is waived for the transfer.

An improper transfer carries tax penalties. If the account owner withdraws money from their IRA and hands it to their ex-spouse, the IRS treats that withdrawal as a standard distribution to the owner. The amount withdrawn becomes part of the owner’s taxable income and if the owner is under age 59½, they will also be assessed the 10% early withdrawal penalty.

Once the funds are successfully transferred into the receiving spouse’s IRA, they assume full ownership and responsibility for the assets. The money continues to grow tax-deferred (in a Traditional IRA) or tax-free (in a Roth IRA). Any future withdrawals the receiving spouse takes from their IRA will be subject to the normal tax rules applicable to that account.