Complications in splitting an IRA in a divorce

Marital breakups among older adults are on the rise even though divorce rates for younger age groups are falling. Dividing retirement accounts may be a particular concern for older spouses going through a “gray divorce” in Kentucky. For 401(k)s and certain other types of plans, a document called a qualified domestic relations order must be prepared before the account can be split. For an IRA, the process is usually simpler, requiring only that a copy of the divorce decree be submitted to the account custodian.

However, if the account owner has begun taking what is known as 72(t) distributions before reaching the age of 59 1/2, the process may seem less straightforward. While these distributions do incur the usual 10% penalty for early withdrawal, there are exceptions, such as to purchase a home for the first time or to pay certain medical bills. However, the distributions are governed by several rules, one of which is that there cannot be a modification to the account.

While splitting the account in a divorce appears to be a modification, when people have sought private letter rulings from the IRS, the agency has been more flexible. PLRs are out of reach for many due to cost, but some financial professionals believe the agency’s consistency is a good guide in this situation.

Whether divorcing spouses go to court or decide to negotiate an agreement on their own with attorneys, splitting a home can raise certain issues as well. One or both partners may be emotionally attached to the property and might not want to let it go. If they do decide to sell it, this process could still take some time. They may then need to decide how to split expenses until the home sells.