Thursday, March 03, 2016

Retirement Transfers with IRAs Upon Divorce

In a divorce, spouses can transfer retirement funds from one spouse's account to the other spouse as part of the property settlement in the divorce mediation. In this post, San Francisco Divorce Mediator Shelley Kennedy describes the steps involved in transferring IRA funds between spouses.

Distributions (withdrawals) from a retirement account are subject to taxes (other than qualified Roth distributions and any amounts already taxed) and there is also typically a 10% penalty associated with early withdrawals if the funds are withdrawn before age 59 1/2. Depending on what type of retirement accounts you have (i.e., pension, 401(k), 403(b), IRA, etc.), there are options available to make these transfers without incurring taxes and penalties. As neutral mediators, we work with both of you to discuss the options available to complete these transfers in a way that meets your goals.

One option in a divorce is to roll retirement funds over from one IRA account to another retirement account, or even one in your spouse's name, which allows you to avoid paying tax on the transfer until the funds are withdrawn from the new plan at the time of retirement and also avoids incurring penalties. Transferring retirement funds in this way is referred to as a "trustee-to-trustee transfer" (or more informally known as an “IRA to IRA transfer”). This involves having your IRA financial institution make a transfer directly from your IRA to another IRA or retirement plan without actually producing cash from the retirement account at the time of transfer.  If you have a 401(k) from a previous employer, you may be able to roll that over into an IRA in order to use it to transfer funds as described here. Once you have agreed to an IRA-to-IRA transfer of retirement funds in your case, the following steps should be taken to carry out the transfer:

Step One: The spouse whose name is on the account contacts the IRA institution/bank to discuss the bank’s specific procedures for a trustee-to-trustee transfer of IRA funds (using this specific language is important to get the right information from your bank):
  • What documentation is needed to initiate the transfer? Requirements vary by institution, but your bank will either require a signed agreement (this is usually the signed settlement agreement), a filed court order, or even a certified copy of a filed order. Some banks also have an internal form that can be signed/notarized to initiate the transfer.
  • How should the documentation be provided to the bank (email, fax, or in-person)?
  • What is the processing time once the required items are received?
Step Two: Contact the legal professional handling your case to ensure that your formal agreements are prepared with your bank’s specific procedures and that all requirements are met. For example, if a certified copy of a filed court order is required, the attorney will need to ensure that the court order contains the information required by the bank and request a certified copy of that order.

Step Three: Provide the required documentation to the bank to initiate the IRA to IRA transfer If the bank will accept a signed but unfiled agreement, this can happen as soon as your agreements with your spouse are signed without needing to wait for the court-approved judgment or order, (which often takes months). Otherwise, you will need to wait until the court has approved the judgment or order and then send the filed documents (or certified copy, if required) to the bank along with any other forms/documents required. Once the bank has the documents it requires, the bank will transfer the IRA funds from one spouse to the other as directed and you’re done!

Author: Shelley M. Kennedy