How are IRA divided in a divorce?

If you and your spouse are going through a divorce, you will be required to split all the marital property acquired during the marriage, including assets held in retirement accounts such as IRA. Whether you are giving or receiving IRA retirement assets, you should understand the rules of dividing an IRA in divorce.

IRA assets are considered marital assets, and they are subject to division between spouses through a process known as a transfer incident to divorce. The spouse who receives a share of the IRA assets must have an IRA account where the retirement assets will be transferred to through a trust-to-trustee transfer. A Qualified Domestic Relations Order (QDRO) is not required when splitting IRA assets. 

Is an IRA considered marital property?

An IRA that was opened during marriage and funded with joint funds is considered a marital asset. Depending on the state where you live, the marital property can be divided either equally or equitably. In community property states like Washington, Wisconsin, and Texas, any assets acquired during the marriage are considered marital property and are shared equally regardless of who purchased the assets. In comparison, in equitable distribution states, assets acquired during a marriage are shared fairly but not necessarily equally between both spouses.

If you opened and started contributing to an IRA after marriage, the contributions and any earnings held in the account are considered marital property even if the IRA is registered in one partner's name. However, if you opened the IRA before marriage, and you made further contributions to the IRA after marriage, only funds contributed during the marriage will be considered for division during divorce proceedings.

How an IRA is divided in a divorce

If either party or both parties own an IRA, the retirement account is considered a marital asset and is subject to division in divorce. Usually, the court considers how long the couples were married, when the IRA was opened, each party’s contribution to the marriage, and the incomes of both parties. Also, depending on the state, the assets can be divided equally or equitably between the couple.

Since an IRA is not a qualified retirement plan, a Qualified Domestic Relations Order (QDRO) is not required to split the assets. Instead, IRAs are split through a process known as a transfer incident to divorce. The settlement agreement should include language that shows how the assets will be divided, the method of division, the valuation date for the IRA division, and how gains and losses will be divided.

Before the transfer of retirement assets is initiated, the spouse receiving part of or all of the retirement assets will need to have an IRA account in their name. If the spouse does not have an IRA, he/she can open an IRA with the IRA custodian where the main IRA is held. Once the account is opened, the spouses should send the divorce decree to the custodian holding the IRA assets, indicating how the assets will be split. If the custodian is satisfied with the documentation provided, the funds will be transferred to the other spouse’s IRA within a few days or weeks.

Does dividing IRAs in divorce create a tax liability?

When the IRA division of assets is treated as a transfer incident in the divorce settlement, the transfer of assets will be made tax-free as long as the funds remain in the recipient’s IRA.

Once the receiving spouse takes ownership of the transferred assets, they assume responsibility for any tax liabilities that arise from future distributions. If any of the spouses withdraws money from their IRAs, they will pay income taxes, and a potential 10% penalty if they are below 59 ½.

However, if you did not label the division of assets appropriately, you could owe income taxes and a potential 10% penalty tax on the entire distribution. The instructions you provide to both custodians should clearly state that it is a transfer related to divorce, and it should satisfy the courts and the state laws. The instructions should state the IRA division percentage, the amount of assets being transferred, and the account numbers of both parties in the transfer.

Beneficiary designations after divorce

Once you have finalized the divorce and transferred part of or all of the IRA assets, you should update your beneficiary designations. If your former spouse is longer one of your IRA beneficiaries, you should remove him/her from your IRA, and add other beneficiaries such as your children, spouse (if you have remarried), parents, brothers/sisters, etc. Also, if you die without naming a beneficiary in your IRA, your IRA will be considered to be part of your estate, and your IRA assets will be subject to a probate process.

Can an ex-spouse inherit a deceased spouse’s IRA after divorce?

If an IRA owner dies without removing the ex-spouse from the list of IRA beneficiaries, the ex-spouse could inherit the deceased spouse’s IRA. Usually, divorce decree or legal separations do not change a beneficiary designation, and the IRA owner must update the beneficiary designation after the divorce if they do not intend to have the ex-spouse as a beneficiary. However, a divorce decree may state that the ex-spouse remains a beneficiary in the other spouse's IRA.

If the deceased IRA owner lived in a community property state, the designation naming the ex-spouse as a beneficiary may be limited if he/she was not named as a sole primary beneficiary. Also, state laws may limit the value of assets considered to be marital property to 50% of the total asset value.