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Distribution from IRA as a result of a divorce


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5 replies to this topic

#1 pete30075

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Posted 03 December 2004 - 01:03 PM

Situation:
A husband and wife are getting a divorce before Dec 31, 2004. As part of the divorce settlement, the husband is required to pay $50,000 to wife at the time of the divorce. The husband is 68 and the wife is 63. The husband has an IRA, from which the funds will be used for the settlement.

The husband has 3 options;

A: Withdraw the money from the IRA and pay the ex-wife.
What is the tax liability for the husband and ex-wife?

B: Roll the money over to the ex-wife's IRA.
What is the tax liability for the husband and ex-wife?
If the ex-wife withdraws a lump sum amount from the IRA, what is her tax liability?

C: Roll the money over to the ex-wife's Roth IRA.
What is the tax liability for the husband and ex-wife?
If the ex-wife withdraws a lump sum amount from the Roth IRA, what is her tax liability?

Which one favors the wife and which one favors the husband?

#2 mbozek

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Posted 03 December 2004 - 01:16 PM

IRC 408(e)(6) provides for a tax free transfer of an interest in an IRA on account of divorce to ex spouse's IRA which will be owned by the ex-spouse. See IRS Pub 590, P 25. This is not a rollover but a transfer by the custodian of the IRA assets to an IRA owned by the ex-spouse pursuant to a divorce decree and/or property settlement. A transfer of IRA assets by the owner to the ex-spouse's IRA is a taxable distribution to the owner.
mjb

#3 pax

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Posted 03 December 2004 - 02:45 PM

A. Husband declares IRA withdrawal as taxable income. Ex-wife gets the money tax-free.

Hence, answer from mbozek.

#4 mbozek

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Posted 03 December 2004 - 03:45 PM

As a followup to pax's post, if the husband withdraws $50,000 and pays it to spouse then H will wind up paying 50,000 plus the income tax which will be at least 25% ($12,500) which will be more than the spouse is entitled to under the divorce.
mjb

#5 pax

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Posted 03 December 2004 - 04:11 PM

Hmm. Since the $50K is more than the "gift tax limit", would such payment to the ex-spouse also trigger the gift tax, or might the divorce order have a bearing on that?

Edited by pax, 03 December 2004 - 05:56 PM.


#6 mbozek

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Posted 06 December 2004 - 10:37 AM

Under IRC 1041 there is no taxable gift on a transfer of property between spouses or former spouses incident to divorce. The transferee gets the transferor's basis in the property. Also there is no taxation on gifts until the amount of lifetime transfers exceeds $1M.
mjb