Divorce and 72T
L1: Divorce and 72THello all: My question is, in the case of a divorce where the person is currently receiving payments under a 72T arraingement. Is the spouse entitled to 50% of the IRA after the divorce or 13%? I did some research and though I found a lot of info, the info was mostly quoting the PLRs and I couldn’t quite understand the answer. If you would respond in “laymen” terms, I would greatly appreciate it. Also, I am 56 and my husband is 61. I have been collecting payments since 2009. Don’t know if you need that info, but thought I’d add it anyway. Your response is greatly appreciated..2012-04-13 15:41, By: Rosa, IP: [220.127.116.11]
L2: Divorce and 72TIn a divorce situation, disposition of IRA’s is a function of negotiations … terms and conditions agreed to by the parties. From what I have seen, IRA accounts may be split just like other assets of the marriage.
However, when a 72(t) is involved like in your case, dividing the IRA becomes more problematic since “Divorce” is NOT an exception to the 10% Early Withdrawal Penalty. Only “death” and “disability” are acceptable exceptions to the penalty, besides doing a 72(t).
My suggestion is to work out a deal to split the distributions of the 72(t) IRA until the 5-year, age 59.5 rule is satisfied, then split the corpus of the IRA. I think you would get this same suggestion from others on this board. No, I’m not an attorney but a Financial Planner / Tax Preparer.
Jim F2012-04-13 15:51, By: Jim F, IP: [18.104.22.168]
L3: Divorce and 72TThanks Jim, for your quick response. Do you know if there are “specific” lawyers that deal with these types of financial questions when a divorce is concerned? Or is the rule as simple as once divorce is imminent 50% of assets are split down the middle regardless to how long the marriage was in effect vs. how long the IRA was in effect? I’m married 10 years, but my IRA has been in effect for 30 years. I’m assuming that it doesn’t matter. It’s still 50%, but I just would like some clarification. This is for the State of NY by the way.
2012-04-13 16:02, By: Rosa, IP: [22.214.171.124]
L4: Divorce and 72TWhat is really comes down to, is that the parties involved make the determination.
It may be 50%, but what assets make up the 50% doesn’t mean that every asset must be divided in half. Example, you may keep 100% of the IRA and make up the 50% to your spouse with a larger percentage of a different asset. Of course, it is also always easier if the divorce is friendly.
Suggestion, if your spouse gets an attorney, get a different attorney to represent you. If you both agree to the terms and keep agreeing, then one attorney should be able to draw up the documents.2012-04-13 16:27, By: Gfw, IP: [126.96.36.199]
L5: Divorce and 72TGood advise.. Thanks!2012-04-13 16:45, By: Rosa, IP: [188.8.131.52]
L4: Divorce and 72TI am not an attorney, but you should get YOUR OWN DIVORCE ATTORNEY ASAP !!! Get one who understands the TAX ASPECTS of DIVORCE, and possibly retain a tax specialist who understands it as well !!! Also, get IRS Pub 504 WHICH IS DEVOTED TO THE TAX SIDE.
1. You should arrange for a “QDRO”, which is a “QUALIFIED DOMESTIC RELATIONS ORDER” from a court/judge to allocate/transfer an interest in a qualified retirement plan (not an IRA).
2. At your ages, I assume dependents are not an issue.
3. There are tricky nuances to how/what is split. Don’t get trapped or fooled. The gains on the sale of personal residences are tax free up to a gain of $ 500,000 per couple, but only $ 250,000 per single. On the other hand, all distributions now and in the future are subject to being taxed at the regular tax rates. SO — a $ 500,000 house (after commissions, etc.) costing $ 250,000 would net $ 500,000 after -0- taxes , while a $ 500,000 retirement account will net $ 375,000 after 25% taxes.
4. Retirement benefits transferred under a QDRO are taxed when received, but NOT SUBJECT TO THE 10% PENALTY. Therefore, do NOT set up a SEPP 72-T PLAN if there is a retirement plan, other than an IRA involved. To qualify for a QDRO distribution, the funds must be distributed to the former spouse directly from the plan.
5. A distribution received by a former spouse under a QDRO can be rolled over TAX-FREE into an IRA. HOWEVER, due to the 20% WITHHOLDING rule, a direct trustee-to-trustee transfer is the preferred approach, BUT BUT BUT — subsequent distributions from the IRA will be subject to to the 10% penalty if the recipient is under 59 1/2 when distributions are taken. Therefore, in your case, do NOT roll over any RETIREMENT PLAN to an IRA. If there are only IRAs involved, then QDRO’s do not apply.
6. There is no requirement that assets be split 50/50. It is a NEGOTIATION. Often the assets are not split that way because of the earning power of the respective spouses.
7. SEE # 1 ABOVE !!!2012-04-13 16:52, By: dlzallestaxes, IP: [184.108.40.206]
L5: Divorce and 72TThanksdlzallestaxes. We are both retired. I started the 72T back in 2009. There is no retirement plan other than my IRA and his current pension. I’m taking from what you’ve mentioned that a QDRO would not apply in this instance?2012-04-13 17:55, By: Rosa, IP: [220.127.116.11]