Individual retirement accounts and annuities (IRAs) are typical retirement assets that may be divided in a divorce.
Key Issues with IRAs
Types of IRAs
- A Traditional IRA is funded with pre-tax contributions, the contributions and earnings are taxable when distributed and distributions prior to age 59 ½ (with few exceptions) are subject to a 10% premature distribution penalty.
- A Roth IRA is funded with after-tax contributions, the contributions and earnings are not taxable when distributed if certain requirements are met, and the 10% premature distribution penalty would only apply to any portion of the distributed earnings that is taxable.
Assignment of Benefit
- A Traditional IRA is funded with pre-tax contributions, the contributions and earnings are taxable when distributed and distributions prior to age 59 ½ (with few exceptions) are subject to a 10% premature distribution penalty.
- A Roth IRA is funded with after-tax contributions, the contributions and earnings are not taxable when distributed if certain requirements are met, and the 10% premature distribution penalty would only apply to any portion of the distributed earnings that is taxable.
Settlement Agreement Provisions
- Specify type of IRA and funding company.
- Include last four digits of account number.
- Specify date for determining the amount of assigned benefit.
- Address if adjustment for investment gains/losses will apply.
- Consider aggregating all IRAs and, if possible, take the assigned benefit from the IRA with the easiest transfer rules.
- If the value of the Roth IRA(s) is significant, avoid aggregating traditional IRAs and Roth IRAs.