How To Guide: Divide Your Self-Directed IRA Due to Divorce
Unfortunately, sometimes people get divorced. It’s not fun, but it happens. If it does, you need to consider all the assets that need to be divided— and that includes your self-directed IRA (and IRAR’s here to help).
We do our best to keep this process as simple as possible. Splitting your self-directed IRA due to divorce doesn’t have to be a confusing or time-consuming process, even if everything else involved in this process sometimes feels that way.
If this is what you need to do, here’s the process:
Splitting Your Assets: The RIGHT Way
Don’t just take a distribution and divide the assets yourself— you CAN do that, but there’s a couple reasons you won’t want to.
If you distribute those assets before dividing the account, you (the IRA-owner) are paying all the associated fees, taxes, and (potential) penalties for this process— costs your ex-spouse would otherwise be sharing.
If you do it this way, you and your ex-spouse are losing out on the potential benefits of keeping those funds in a retirement account. Once distributed and divided, they can’t be put back. These funds don’t have to leave the IRA— they just have to be split according to the divorce decree.
Usually when you distribute funds from your IRA, you owe taxes (unless you have a Roth IRA) and there are penalties if you do this before 59 ½. But that’s why you need to split your IRA the right way— there’s a special IRS exception for divorce agreements, where you and your spouse don’t get taxed (IRC 408(d)(6)).
Of course, IRAR is not a tax or legal advisor —we can only instruct on process and procedure— we don’t know your personal situation. If you have any questions about how this applies to you, please contact a lawyer or financial professional for guidance.
Here’s how it typically works:
The key to an easy process is to complete the correct forms.
IRA-owner must complete:
- An IRAR Distribution Form
- A IRAR Fair Market Valuation Form for each asset, if applicable
- Your full Divorce Decree
Ex-spouse must submit the following:
- New Account Application - this is required in order to move the funds out of the IRA-owner's account.
- If the ex-spouse wanted to keep the funds at IRAR Trust in their new account established, they don't need to do anything else.
- Transfer Form - to move the funds to another institution, the ex-spouse must complete a Transfer form for the institution where the funds are being moved.
- Distribution Form - to take the account assets personally— for example, cash in the account.
As the IRA-owner, you’ll need to start the process. Submit an IRAR Distribution form and a full copy of the divorce decree, then we’ll begin the process of splitting your account. Make sure to check the box of the distribution form, noting “Divorce Distribution”, to speed up the process.
We need a full copy of the divorce decree— not the relevant pages or an abridged version, we need the entire document to ensure there’s nothing included that impacts our processing of your transaction.
Your ex-spouse will need to let us know what they want us to do with their portion of your IRA. They can either open an account at IRAR with an account application, move their funds to another retirement account with a transfer form, or distribute those funds outside the IRA with their own distribution form. We will need their paperwork to finalize the process.
Relevant: Transfers vs Rollovers: What's the Difference?
Dividing the Self-Directed IRA Step-By-Step For The IRA-Owner
The divorce distribution process is different for each party— but we do our best to make it as simple as possible.
For the IRA owner, the process is very straightforward. We need a few documents— but they must be complete. We’re looking for:
- A completed IRAR Distribution Form
- A completed Fair Market Valuation (FMV) Form for each asset in the account being divided
- If you plan on liquidating all assets before dividing the account, there is no need to fill out an FMV form. This form is only required for assets being moved in-kind.
- If you’d like more information on this process, you can see our FMV information center.
- A full (not partial) divorce decree
- Submitting only a partial decree is the biggest slowdown during this process— we need the complete agreement and cannot complete your transaction? without it.
This is done using our normal distribution form, so if you’ve taken an IRAR distribution before, it should look familiar— just remember to mark the “divorce/legal separation”
In the distribution details of the form, you’ll outline exactly what assets or percentage of assets are to be moved to your former spouse’s new IRA. This is also where you’d note if your assets are to be liquidated or transferred in-kind.
If you’re looking to distribute the remainder of your IRA, please complete two separate distribution forms— one for your divorce settlement, another for your personal distribution.
Once all paperwork is submitted and complete, we are typically able to process in 2-3 days. Once the funds have been moved from your account, the IRA-owner’s part is done— unless you have assets to re-register (see below).
Dividing the Self-Directed IRA Step-By-Step For Your Ex-Spouse
Both parties need to have an open retirement account, so we have somewhere to move the funds and/or asset(s). If your former spouse does not and they want to keep the funds in an IRA, they’ll need to open one. They can either open an IRAR account, or one with another provider. Keep in mind, self-directed assets are not always able to be held at all other institutions. If attempting to transfer to a traditional retirement provider, you may need to liquidate your assets before you are able to move your account.
1- Open a New IRAR Account
To do that they’ll need to submit:
- A completed IRAR Account Application
- A copy of a signed government-issued ID
Once the account is open and the correct paperwork has been submitted for both parties, the funds and assets are moved into the account (unless you aren’t liquidating your assets, see below). Then it’s treated like a normal IRA— able to be invested, distributed, or moved to another custodian.
2- Transfer to Another Provider Or Take a Distribution
Transfer to Another Provider
If your ex-spouse wants to instead move their portion of the IRA to an account at another provider, they can do that with a transfer. They’d submit a transfer form to us to begin the process. With a transfer, they will get this form for the other provider, so confirm those details to ensure speed and correctness during this process.
Distribute the Cash Out of the IRA
If your ex-spouse would rather distribute the funds to themselves personally, outside of the IRA, they can do so. If the taxes are to be paid by your ex, they’ll need to have their own account open at IRAR. Then they’d submit their own distribution form. If you are required by the divorce decree to pay these taxes, they’d still submit a distribution form but note instead a divorce distribution and include your account number.
Any applicable taxes, fees, or penalties will need to be paid on the distributed assets. Regular income tax will be due on the amount, as if taking a typical distribution.
Assets In-Kind and Re-Registration of Real Estate
Assets being moved in-kind (meaning they aren’t being liquidated beforehand) will need their ownership reassigned, as outlined in the divorce agreement, with the ownership percentages clearly spelled out. If you currently hold assets in your self directed IRA and want to move the funds to your ex-spouse in cash, you need to move to liquidate these assets before beginning the divorce distribution process.
For example, a re-registered promissory note would read:
IRAR Trust FBO John Smith IRA 12345 50% and IRAR Trust FBO Jane Smith IRA 45678 50%
If one or both of you are moving your assets outside of IRAR (to another custodian or outside of an IRA all together), you’d title the asset similarly (but with their or your name instead of the name of your IRAR IRA).
Any asset being moved in-kind requires a completed FMV (including the appropriate supporting documents) to process. This is so we can be sure the asset is fairly and accurately moved in accordance with the divorce agreement and the asset’s current value.
REMEMBER: If you are moving assets outside your IRA, there are taxes due on the value of the asset— even if you aren’t distributing cash. Keep this in mind so you aren’t surprised at tax time.
Non-Real Estate Assets
For a non-real estate asset, we will send off a copy of the re-registration documents to the investment provider, showing the updated holdings and percentage of ownership. They will make the adjustment on their official books. They should send us a certificate in return, acknowledging the receipt and re-registration of the asset(s).
- SMLLCs/IRA LLCs
- Private Placements
- Private Loans/Lending
- Promissory Notes
- Other Alternative Investments
Real Estate Assets
If your IRA holds real estate, the process is a little different. You are responsible for getting the official deed recorded in the proper names and percentages with the county office— IRAR cannot do this for you. Keep this in mind when thinking about your timeline.
The requirements vary by county, but most require a quit claim deed signed by IRAR (on behalf of your IRA, the asset-owner). Please confirm the exact requirements with your county. They may have their own suggestions for reputable quit claim services, but you can also find resources online if you’d prefer.
Relevant: How To Re-Register Your Real Estate IRA Assets
Once the deed is drafted, you’ll need to sign it as “read and approved” wherever a signature is required and then forward it to us— which we will sign it and then mail it back to you. IRAR always signs on behalf of your IRA. You must then take the deed to the recorder’s office and file your deed— or there’s no official record of the change in ownership.
There may be costs associated with this process, depending on the individual county, but IRAR does not charge to process these requests. If you have more questions about this process or the requirements, contact an IRAR representative and we’d be happy to direct you.
The Costs for an IRA Divorce Division
There’s no charge for processing a divorce division, though there are some fees associated with this process. If your account holds only cash, there are only fees based on how you want the funds delivered ($7 for a check, $30 for a wire). If your account hold assets and needs to split or move them in some way, there is a $50 fee per-asset for re-registration.
If your ex-spouse plans to open an IRAR account of their own, there is a one-time $100 account opening fee, but there are no fees for processing a transfer, or distribution (aside from the above-mentioned delivery of funds and re-registration fees).
If transferring the IRA, there’s no reporting or taxes, but rollovers and distributions are reported to the IRS. If you or your ex chose to distribute your portion of the account, you will owe regular income taxes on the value (per IRS Reg 1.408-4(g)).
Here’s what you need to know:
In a Nutshell
Though this is a process no one hopes to go through, at IRAR we do our best to keep the process quick and easy. Once we’ve received a distribution form and a copy of the divorce decree, if everything’s in order we’re ready to get started. We’ll let you know if we need anything else to complete the process.
If you have any more questions, please don’t hesitate to call 888-322-6534.