As some California couples begin the divorce process, retirement accounts, including IRAs, will be on the table for negotiations. Unlike other retirement accounts, which need a QDRO for their division, IRAs are divided based on the negotiations that lead to the divorce agreements.
When couples are negotiating the division of marital property, they might also negotiate how to split existing IRA accounts. Because IRAs are set up in a way that can lead to steep penalties if the established rules are not followed correctly, the division of IRAs and what each spouse does afterward with the money need to be carefully considered. As IRAs were originally set up to help people save enough for retirement, Congress created certain rules to encourage people to use funds for their intended purpose. Distributions of IRA funds are subject to regular income tax as well as a 10% penalty for early distribution unless at least one of the few exceptions are met.
During a divorce, couples negotiate how the IRA funds will be divided. Once this is accepted by the court, the IRA custodian will then execute a non-taxable transfer of the funds into a new IRA for the receiving spouse, unless they already had an IRA. After this transfer, both spouses must then review their IRAs to see if they will incur any fees for early distribution or for modifications to the account. There may be some flexibility by the IRS on how both spouses can deal with the money from IRAs, but each case is different.
Divorcing spouses might find it beneficial to speak to a lawyer with family law experience who can provide guidance during this process. A lawyer might explain how similar cases have been handled as well as what the state and federal laws are regarding division of property.