Divorce and Self Directed IRAs: The Simple How-To

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Divorce isn’t usually in the plan— but sometimes it happens. With approximately one divorce happening every 36 seconds in the US alone, it’s not an uncommon occurrence. If this is your situation, and you’ve got to divide your retirement account, we’re here to help.

Here’s how to complete this process with simplicity— at IRAR, we do our best to make the parts of life we can control as easy as possible.

Don’t Take a Normal IRA Distribution

Many investors think they know how to handle this process— you distribute the funds, potentially pay the early distribution penalty, and then divide among the spouses, right? Not exactly.

If you split your IRA this way, not only will you end up paying all the associated taxes and (potential) penalties, your former spouse will also lose out on the potential tax-advantages of these funds, as they’ve already been distributed, and can’t be rolled back into a retirement account.

Any time funds leave an IRA and don’t return, that’s considered a distribution— and usually there are penalties if you do this before 59 ½. The IRS has a special exception for divorce agreements, where the transfer of an individual’s ownership interest in an IRA to a former spouse does not qualify as a taxable event, according to IRC 408(d)(6).

So, what is the process? It’s simpler than you might think.

Documents Required to Process

To divide your IRA due to a divorce, IRAR needs:
IRAR Account Holder Ex-Spouse
   A Distribution Form  Has or Opens an IRAR Account  Has or Opens a Non-IRAR IRA
   A full divorce decree  Open IRAR account— nothing   else needed  Submit a Transfer Form
 

Relevant: Transfers vs Rollovers: What's the Difference?

 
The IRAR account holder will need to complete our distribution form, making sure to select “divorce/legal separation” under section 3. This form, along with the full divorce decree (and, if the funds are going to an IRA outside of IRAR, a transfer form from the ex-spouse), is all that’s required to process. Be sure to submit the full divorce decree, not a partial decree— we need the entire document to process.

Please include an exact breakdown of how the account will be split— if your account holds 4 assets and each party gets 50% of the IRA, how is this to be divided? Is it 50% of each asset, 2 assets each? — specificity is essential to ensure correctness.

If you and your former spouse are splitting ownership of any assets, we will complete the re-registration paperwork (showing the asset ownership has changed) and send it off to the investment provider, where they’ll update the information in their system.

If your assets are real estate (or promissory notes secured by real estate), you are responsible for making sure that all documents are recorded properly with the correct county. An IRAR Representative would be happy to answer questions if you’re confused about the process.

Example:

IRAR client John Smith is looking to divide his IRA 50/50 with his ex-wife (Jane Smith), per a court ordered divorce decree. John’s IRA owns 2 rental properties and has $100,000 in cash.

John submits a completed Distribution Form, noting the reason as divorce in section 3, along with the full divorce decree. As spelled out specifically in the divorce decree and on the distribution form, both John and Jane will receive 50% ownership of each property and $50,000 cash.

If Jane doesn’t have a retirement account, she’ll need to open one. This doesn’t have to be with IRAR, but the assets must be moved into an IRA.

If Jane has or opens an IRAR account, she doesn’t need to do anything— no forms are needed from her once the account is open. After John submits his distribution form and the divorce decree, IRAR will process as instructed.

If Jane has or opens a retirement account at another provider, she’ll need to submit a Transfer Form*, indicating the funds are coming from another IRA due to divorce.

TIP: To speed this process up, you can submit this transfer form with the initial distribution form and divorce decree.

Once IRAR has all the completed paperwork (Distribution Form, divorce decree, Transfer Form), we’ll process within 2-3 days. NOTE: There may be some additional steps to re-register depending on asset-type— an IRAR representative will explain more fully during your transaction if this is the case.

If, after the fact, John or Jane want to take a portion of these assets out of their IRAs, they’d submit distribution forms once the divorce division has been completed. 

Fees & Other Costs

We try and keep fees minimal during this process, but there still may be some associated costs

Potential Divorce Distribution Fees
Account Opening Fee: $100
Check: $7
Wire: $30
Re-Registration Fees: Variable (non-IRAR fees, vary by state and county)

 

Both parties will need an IRA account to process this transaction. If the former spouse does not have an account, they will need to open one, and there may be a fee for that depending on where you open your account— at IRAR, the fee is $100. If either party wants to transfer, or distribute the funds after they’ve been officially split, there isn’t a charge for that— however, there may be a charge depending on how you want the funds delivered (a check for $7, a wire for $30, and no charge for an ACH).

The cost of the re-registration process is different depending on the state and county, but for re-registration due to a divorce we charge no IRAR fees to re-register your assets (typically there is a $50 fee per-asset). See our reference page for a more complete breakdown of IRAR’s fees.

Important to Remember:

  • Don’t just distribute the funds to yourself and give them to your ex— you’ll end up paying all the associated taxes and fees, plus your former spouse is losing the tax-advantaged status of their funds.
  • When submitting your paperwork, submit the full divorce decree, not just a partial or portion— we need the whole decree to process, and it’ll hold up your transaction.
  • Make sure to spell out exactly how the IRA is to be divided— who gets what percentage of which asset, and any other relevant details. Confusion can hold up the process.
  • Your former spouse must have an IRA — we can’t transfer cash or assets directly to a non-IRA holder. If they don’t already have IRA, they’ll need to open one. 
  • If dividing assets in-kind (aka not-liquidating), whoever receives the asset(s) are then responsible for any future taxes or penalties— so when one person takes ownership of an asset, they are now responsible for future fees for this asset. 
  • When re-registering real estate, it is the responsibility of whoever receives the asset to make sure everything is registered with the appropriate county. If you have any questions, we’re happy to answer to the best of our ability.

Conclusion

Though not a process anyone hopes to go through, at IRAR we do our best to make it a simple one. Once we have the distribution form and full divorce decree from the IRA owner, we’re ready to get started. If everything is in order, we’ll make our part of the process quick and easy.

Is there anything else we can help you with, or any additional questions you may have? Our CISP designated representatives are available to assist as needed.

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