Individual Retirement Accounts (IRAs) and Divorce
In Georgia, Individual Retirement Accounts or IRAs may be subject to equitable division upon divorce, just like liquid accounts such as savings accounts or money market accounts. Like any other form of property, though, an IRA or a portion of an IRA must be deemed marital property to be subject to equitable division. An IRA may be considered marital if it was acquired during the marriage. Courtney v. Courtney, 256 Ga. 97 (1986) and Andrews v. Whitaker, 265 Ga. 76 (1995). This principle applies even if the IRA was earned due to the labor or only one spouse during the marriage.
Unlike 401(k)s, a qualified Domestic Relations Order (QDRO) is unnecessary to divide an IRA upon divorce. According to federal law, an IRA may be split between former spouses upon divorce without the transferring spouse suffering any adverse tax consequences or penalties. 26 U.S.C.A. § 408(d)(6). According to this section of federal law, a transfer from an IRA may be made to a former spouse if it is pursuant to a decree of divorce or a written instrument incident to a divorce, such as a separation agreement or settlement agreement. Generally, to effectuate a transfer of funds held in an IRA upon divorce, a letter of instruction and a copy of the Final Judgment and Decree of Divorce must be forwarded to the financial institution holding the IRA. Additionally, some financial institutions may also have an institution-specific form that must also be completed to effectuate the transfer.
To successfully effectuate the transfer of IRA funds upon divorce, it is essential that the divorce decree or settlement agreement specifically identify the account or accounts to be divided and outline precisely how the funds are divided. This identification normally takes the form of identifying the account by the account holder's name and account number in the decree and specifying the dollar amount or percentage of the account that is subject to transfer. Several methods may be used to transfer IRA funds from one former spouse to the other upon divorce. The most common methods are listed below:
- Transferring a fixed dollar amount or percentage of the owner spouse's IRA to the recipient spouse's IRA. This method may be preferable if the recipient spouse already has an IRA account to which the funds rolled over into.
- Setting up a separate IRA for the transfer amount to be transferred into and then assigning this new account to the recipient spouse by changing the account's name. This method of transfer is generally utilized when the recipient spouse does not have a preexisting IRA account.
- Assigning the entire IRA account to the recipient spouse and changing the name on the original account to reflect the ownership change. This method may be the easiest mode of transfer if 100% of the account is transferred to the recipient's spouse.
As mentioned above, federal law provides that IRA assets divided according to a divorce decree or court-approved separation agreement are treated as a non-taxable transfer. Thus, these transfers are not subject to the tax consequence and penalties that would normally accompany an early withdrawal from an IRA. However, if the transfer of funds is completed incorrectly, the transferring spouse may be penalized. For example, suppose an individual transfers IRA assets to a former spouse without receiving a divorce decree or court-approved separation agreement authorizing the ownership change. In that case, the transferring spouse will be required to treat the transaction as a distribution to him or herself and thus declare that amount as income for tax purposes.
To ensure that neither the transferring spouse nor the recipient spouse suffers any adverse consequences as a result of an IRA transfer, any IRA transfer must be provided for in a divorce decree, or court-approved settlement agreement, or marital dissolution agreement and that the funds be transferred directly from one spouse's IRA to the other spouse's IRA. If the recipient spouse is not immediately able to transfer the funds into his or her IRA, that spouse has 60 to reinvest any distribution received into his or her own IRA. Failing to adhere to these requirements may result in the transferring spouse owing federal income taxes plus a 10% penalty on the transferred amount. It may also result in the recipient spouse suffering adverse tax consequences as well.