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Tips for splitting an IRA in a divorce

Divorce is on the decline overall, but among older adults, it is rising. This so-called “gray divorce” can lead to some possible complications in dividing property. For example, people who have not yet reached the age of 59 1/2 may have begun taking 72(t) distributions from an IRA under certain limited circumstances that do not incur a 10% penalty. However, this could have implications if the IRA is divided.

According to IRS regulations, if there is a modification to the account, this penalty will be retroactively assessed. As a modification is defined, it appears that splitting the account in a divorce could trigger this penalty for the distributions the person has received. Some people have sought clarification from the IRS in a private letter ruling.

Although they are publicly available, PLRs are not meant to be taken as guidance for anyone but the individual for whom the PLR is written. PLRs can cost thousands of dollars and could take more than a year, so for many people, they are not an option. However, the IRS has been consistent in its PLRs and has not been penalizing people in this situation. Individuals taking 72(t) distributions who cannot or do not wish to spend the time and money on a PLR may want to consult a financial professional.

There are other complications that can arise during property division in a divorce. For example, if one person owns a business, the other spouse may be able to claim a portion of its value. If the couple own a business together, they might have to decide whether one will buy the other person out or if they will sell it and split the proceeds. Couples may prefer to negotiate property division with their attorneys instead of going to court.