How to Handle Settlement Funds From an IRA Account

One outcome of a divorce settlement is that you might lose your IRA.
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Despite a couple’s best efforts, a marriage can fail and have serious emotional and financial effects. One outcome might be the partial or full transfer of an individual retirement account from one ex-spouse to the other. This transfer is tax-free if performed correctly.

Divorce Settlement

A divorce court can order the transfer of IRA assets through a “written instrument.” This often takes the form of a qualified domestic relations order, which is a document used to divide a couple's wealth and order periodic payments. However, other instruments can be used, including a decree of divorce, a written separation agreement or a support decree. While a QDRO is often used to divide IRAs, it is actually required for cases involving the division of qualified employer plans rather than IRAs. An ex-spouse must provide a copy of the divorce instrument to an IRA custodian to begin the transfer process.

Transfer Methods

If an ex-spouse is to receive all of the assets in the other ex-spouse’s IRA, the custodian can simply re-title the IRA in the name of the receiving ex-spouse. Alternatively, the divorcing parties can set up a trustee-to-trustee transfer to move the affected assets from one IRA to another. If you are the ex-spouse giving up assets, your custodian can transfer those assets to your former spouse’s IRA. However, you can decide instead to transfer the assets that the court lets you keep to a new IRA in your own name, then re-title your old IRA to your ex-spouse.

New Basis

An IRA might have a cost basis that the divorcing parties must carry forward when they divide the account. An IRA’s cost basis is the amount of nondeductible contributions it contains. Rules governing traditional IRAs can limit the deductions for contributions that you make when you or your spouse belong to a qualified employer plan, such as a 401(k), 403(b) or 457. The limits kick in when your income exceeds certain limits that can change each year. When you withdraw money from an IRA, you don’t shell out taxes on the prorated portion that makes up your cost basis. Use Internal Revenue Service Form 8606 to calculate the cost basis you must carry forward when dividing an IRA.


You might receive your portion of a divided IRA as a check. You have 60 days to deposit the check into your IRA, or you’ll face a tax bill. If you are younger than 59 1/2, the IRS will tack on a 10 percent penalty if you miss the deadline. A divorce can change the size of minimum distributions that the IRS requires from a traditional IRA when you reach age 70 1/2. If your spouse is 10 years younger than you and is the IRA’s sole beneficiary, you can reduce the minimum distribution by using your joint life expectancies rather than just your own. A divorce removes this opportunity, and if you get to keep any IRA assets, your minimum distributions will rise unless you remarry someone no older than your ex-spouse.

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