Can I cash out a Roth IRA from a divorce settlement?
I received a Roth IRA in a divorce settlement. Can I cash it in without a penalty or tax?
It depends on how old you are and how the settlement was made, if you are over 59 1/2 you can withdraw with no taxes or penalties. If funds are cashed out/distributed and then paid to the spouse/ex-spouse, this is considered a 'taxable event' to the owner of the original IRA. It is important that the movement of funds is done as a 'transfer' and not a 'distribution'.
What is required to make this tax-free transfer? According to the IRS, as defined in IRC Section71(a)(2):
a decree of divorce;
a decree of "separate maintenance"; or
a written instrument incident to such decree, or a document.
A "judgment of dissolution" would be a decree of divorce. An order dividing the IRA could be entered as part of such a judgment, or at any time after the judgment is entered.
As with many of these questions, it depends!
If you are over 59 1/2 years of age at the time of the distribution, and you and your ex spouse have had the Roth IRA for less than 5 years, you would be subject to income taxes on the earnings, but not penalties
If you are over 59 1/2 years of age at the time of the distribution, and you and your ex spouse have had the Roth IRA for more than 5 years, you would not be subject to income tax or penalties.
In general, if you are less than 59 1/2 years old and you and your ex-spouse have had the IRA for less than 5 years, your early distribution could be subject to penalties, and the earnings would be subject to income tax.
If you use the money for one of the following reasons, you could avoid the penalty, but not the tax if:
- You use up to $10,000 (lifetime maximum) to pay for a first-time home purchase.
- You use the withdrawal to pay for qualified education expenses.
- You become disabled or pass away.
- If you are unemployed, you use the withdrawal to pay for unreimbursed medical expenses or health insurance.
- You make substantially equal periodic withdrawals until you reach 59 1/2 years of age.
You might need to consult with a CPA before pulling the trigger. My understanding is that you should be able to withdraw from the Roth without penalty or tax (it might also depend on how long the money has been in the Roth).