IRA Transfers and Withdrawls

Let's talk Individual Retirement Accounts (IRAs). Nationally, the amount accumulated in IRAs is approximately 25% of all retirement wealth. It is very likely that IRAs will be divided in a divorce action. One or more IRAs may need to be divided in whole or part and transferred from one party to another.

A transfer of an IRA in the event of a divorce generally is done by either 1) changing the name on the IRA or 2) making a direct transfer of IRA assets to the ex-spouse's new or existing IRA. As long as the assets are kept within an IRA, such a transfer tax free is made pursuant to a divorce settlement under Section 408(d)(6) of the Internal Revenue Code. Once the IRA transfer or name change is completed, the funds in the IRA belong to the ex-spouse. However, a direct transfer of IRA funds to your spouse prior to the entry of a divorce judgment cannot be done because the IRS exception for spousal transfers applies only at divorce.

An individual who takes a distribution from an IRA before age 59 1/2 will pay both income tax on the funds and an excise tax penalty of 10%. After age 59 1/2 only income tax must be paid on the distribution. An individual who reaches age 70 and a half, must start taking "required minimum distributions" from an IRA.

So what if you need funds from your IRA before age 59 1/2? What if something unanticipated occurs after the divorce is final?

There are some other IRS exceptions that would permit a withdrawal from an IRA before age 59 1/2 without incurring the additional 10% penalty, but regular income taxes still apply.

The IRA withdrawal exceptions are the following:

- Un-reimbursed medical expenses of more than 7.5% of adjusted gross income;

- Distributions of not more than the cost of medical insurance for self, spouse and dependents if the owner of the IRA has:

lost his or her job;

received unemployment compensation pay for 12 consecutive weeks;

received the distributions from the IRA during the year he or she has received unemployment compensation or the following year;

received the distribution no later than 60 days after being re-employed.

- The disabled;

- A beneficiary of a deceased IRA owner;

- Persons receiving distributions in the form of an annuity;

Payments must be a series of substantially equal periodic payments (SEPP) over the recipient's life (or life expectancy)

Such persons must take at least one distribution annually for a minimum of five years or until age 59 1/2, whichever is longer.

- Distributions of not more than the cost of qualified higher education expenses for self, spouse, children or grandchildren;

- Distributions to buy, build, or rebuild a first home;

Total withdrawn may not exceed $10,000.

Person benefited are limited to self, spouse, child, grandchild or parent.

An IRS levy; or

A qualified reservist distribution.

The IRS provides exceptions to allow withdrawals from IRAs prior to age 59 1/2, but if you intend to use them you must meet the specific requirements or you may end up paying the penalty tax anyway. Overall, the idea is to keep the funds in the IRA until retirement, so withdrawals are discouraged. However, if you have a dire need, you can get funds. Most persons would not want to be in a situation to need the funds for the reasons presented by 1-3 above. The exceptions that may be more useful are the education and home acquisition exceptions noted in 6-7 above.

Be aware of that there may be tax issues when you transfer or withdraw funds from your IRA account for any reason. To ensure that you comply with the tax laws for IRA withdrawals, seek advice from an expert.