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How taking early distributions may affect an IRA split

On Behalf of | Jan 23, 2020 | Property Division

Houston couples who are getting a divorce may need to divide a retirement account. Some types of retirement accounts, such as 401(k)s, require a document known as a qualified domestic relations order. To divide an IRA, it is only necessary to submit the divorce decree to the custodian of the IRA.

This process may be less straightforward if the owner has begun taking distributions from the IRA before the age of 59 1/2. In certain situations, this is permitted without a 10% penalty. However, if there is a modification to the account, the penalty is retroactively applied to all the distributions. IRS regulations do not specifically address what happens in the case of a divorce and if splitting it is considered a modification.

As a result, some people have sought a private letter ruling from the IRS. These responses, which are made public, are not supposed to be taken as applying to situations besides the particular one in question. However, if the IRS consistently rules a certain way, this is sometimes considered a fairly reliable way to determine how similar cases will be handled. The IRS has been flexible in its PLRs regarding IRS distributions and divorce and do not require the penalty to be paid.

Property division in a Texas divorce is supposed to be equal, but this does not necessarily mean that everything needs to be divided 50/50. In fact, in some cases, a couple might agree that it would be easier for each of them to take certain items instead of splitting them. For example, one person might be attached to the home and want to keep that while the other takes the retirement account. It is important to account for costs such as taxes on the retirement account and upkeep on the home when determining their value.