An Individual Retirement Account (“IRA”) is a personally-owned retirement plan which an individual establishes. There are three types of IRAs – traditional, rollover, and a Roth IRA.
For a quick refresher, in a traditional IRA, the contributions may be tax-deductible, and the earnings are tax-deferred until the time the funds are distributed.
Contributions to a Roth IRA are not tax-deductible and generally the principal and earnings are distributed tax-free. Annual distributions from a traditional IRA are required once an individual attains their required beginning date, while there is no minimum lifetime distribution requirement for a Roth IRA. Generally, a rollover IRA comprises funds distributed from a qualified plan. A rollover IRA takes on the same characteristics of a traditional IRA, so that earnings are tax-deferred and all distributions are taxable.
An IRA may be considered a marital asset subject to equitable distribution in a divorce. So, how can an IRA be distributed to the spouse of the IRA holder?
Taxation of Distribution
There is a provision of the Internal Revenue Code (“Code”) that addresses distributions of an IRA incident to a divorce. In order to accomplish a tax-free transfer, the distribution must be made pursuant to a divorce or separation agreement.
It is important to insure that the property settlement agreement or judgment of divorce clearly specifies that the transfer of IRA funds is required as part of the property settlement and that it is intended to be tax-free under the Code.
As long as the distribution complies with these requirements, the transfer will be tax-free. Nothing further is needed in order to accomplish a tax-free distribution.
Should you be in the midst of a divorce or contemplating divorce, contact the Law Office of Renee Lazar either through email or telephone 978-844-4095 to schedule a FREE one hour no obligation consultation.