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What to do about early IRA distributions in a divorce

"Grey divorce" is the name given to the phenomenon of divorce among older people, and it is on the rise as the rate among younger people is falling. Retirement accounts may be a particularly valuable asset for older couples in California, and they may need to be split in a divorce. This is usually a fairly straightforward process with an IRA, requiring only a divorce decree. With a 401(k) and some other types of accounts, a complicated document known as a qualified domestic relations order is needed.

A potential problem could arise with an IRA if the owner has begun taking distributions before the age of 59 1/2. Normally, distributions before this time are subject to a 10% penalty, but this is not the case under certain circumstances unless there is a modification to the account. The problem is that it is unclear whether dividing the account in a divorce constitutes a modification.

IRS regulations suggest that they do, but some people have sought further clarification with a private letter ruling. PLRs only apply to the individual cases they are replying to, but they are posted publicly. The PLRs have indicated that the IRS takes a more flexible approach than the regulations might suggest.

People who are going through a divorce may want to talk to both an attorney and a financial professional about how property might be divided in a divorce. This can be particularly important for older adults, who may not have many years remaining in full-time employment to make up for financial losses that the end of a marriage often produces. It may be possible to negotiate an agreement for property division without going to court. However, people should make sure they stay focused on their financial security during this process and do not make emotional decisions that could harm them later.

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Law Offices of Catherine A. Schwartz
6877 Magnolia Avenue
Riverside, CA 92506

Phone: 951-335-0510
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