How do I claim IRA funds after a divorce?
This should be pretty straight forward. As long as this is an IRA and not a 401(k) or other workplace retirement plan, you should be able to have your share released to you with just a copy of the divorce decree. If it is an active workplace plan such as a 401(k), you will need a QDRO or Qualified Domestic Relations Order which must be drafted by an attorney. If you don't have an IRA in your name established yet, you will need to to do that. It can be opened where your ex's IRA is or you can choose a different custodian.
To eliminate any taxes or penalties on your share, you want to do a direct transfer from your ex's IRA to yours. If you take it in cash, you will be subject to taxes and a possible penalty.
The settlement should have specified the amount of the IRA which you are entitled to. Your spouse needs to contact the people that are holding their IRA and ask them what their procedures are in order to transfer part of it to you. Each institution may have their own procedures, and there is nothing set in law.
You may or may not have to establish an IRA at the same place, but you must have an IRA established. Once the logistics are in place, then your spouse will authorize a transfer to your IRA. His transfer to your IRA is not a taxable event, however, when you remove the money, you may be subject to taxes and if under age 59 1/2, an early distribution penalty of 10%.
In the decade that I have been handling these issues, I have seen requirements as diverse as a simple letter stating that the division is per the divorce to firms wanting to see the entire decree, via a certified copy.
If your spouse takes the money out of his IRA and gives it directly to you, then they will be subject to taxes and a possible penalty. It must stay within the IRA umbrella to avoid creating a taxable event!
If you have a financial planner, preferably a CDFA®, they can help you go through the divorce decree and let you know what else you might be entitled to and work with you to set goals and a budget for a new chapter of your life.
If you think you’re financial capable, you can do it yourself by transferring the allowed amount from your ex’ IRA to your own IRA (either an existing one or a new one). Regardless which method, it’s best for you do a “Direct Transfer”, which means the check should never be written to you.
For example, you have the “ABC LLC” for your new IRA account, and you transfer a portion of the IRA from your ex’s “XYZ.” You should ask the “XYZ” to do a direct transfer by writing the check that’s payable to “ABC LLC FBO Your Name, IRA.” Then you can mail the check to the ABC.
It’s a quirky rule that the IRS started to enforce in 2015. In the past, as long as you can rollover an IRA within 60 days, you can avoid the tax penalty. However, to prevent abuse from people who want to use their IRAs as a form of “temporary loan,” Congress enacted a rule that limits the 60-day rollover to once per every 12 months. So, even if the check may accidentally write to you, as long as you do the “indirect transfer” once in 2017, you are still okay. But, it’s better safe than sorry; thus the preferred method still is the direct transfer. Best!
You need to contact your attorney about drafting a Qualified Domestic Relations Order, sometimes called a QDRO. This is submitted to the account administrator to separate a portion of the retirement money into your name.
In your divorce decree or marital settlement agreement, there should be information about the IRA such as the custodian, the account number, and the percentage or dollar amount to which you are entitled. Please contact the custodian and give the representative all that information. Each firm has different procedures. You may need your ex to send a letter or sign some documents. If he drags his feet, you have your divorce decree as an enforcement measure. I suggest you open an IRA with the same institution where his IRA is located as that will make the transfer quicker and easier. You can then transfer that IRA to another entity if you wish.
If possible, do not cash out your IRA! You'll have to pay income taxes and potentially a penalty (Roth IRAs are treated differently).
You might find my online course, How Not to Run Out of Money: The Recently-Divorced Woman's Guide to Financial Independence, an affordable educational resource for post-divorce planning, budgeting and investing. You can read the course description here.