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Inherited IRA and divorce questions
Old 10-07-2022, 10:25 AM   #1
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Inherited IRA and divorce questions

Likely getting divorced. Working together on splitting the assets, adult children, getting along. Assets are retirement and house which is a 50/50 split and we keep our own inheritances. From what I read; an inherited IRA may be able to be split. Or at least the IRS doesn’t say yes or no one way or another.

The one spouse who does not own the Inherited IRA could benefit from the income now, so the inherited IRA would benefit them. The Inherited IRA is worth about $400k+. The issue would be drawing that down in 10 years – which would bring the spouse a few years from retirement.

The other spouse, who owns the Inherited IRA does not need the money now and would benefit from keeping 100% of the 401k money and not paying the tax bill now.

Can this be done? Anything I am missing?
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Old 10-07-2022, 10:31 AM   #2
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Not a lawyer, but could the one who owns the inherited IRA keep it and the other spouse get $400k in other assets to make it even? or something like that.

Best of luck to you, sorry you are going through this, however it sounds like you are working to kept amicable.
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Old 10-07-2022, 10:44 AM   #3
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This is probably a common thing the courts deal with (actually the lawyers).
The money from a 401K could be split without taxes, as it would go into an IRA for the other party.
You don't really say ages, but 1 way would be to simply move the 401K to an IRA.

Sounds like lawyers are not involved yet, once they are involved, it may get nasty unless you both firmly have things worked out.

I will say the plan suggested is NOT fair, due to the 10 year rule on the inherited IRA, it's not as flexible as getting a regular IRA by a long shot. Will also "save" the giver of the inherited IRA some taxes as a hidden benefit.

Generally inherited stuff is able to be protected from divorce, if it's introduced to the divorce then it might add to the pile to be split costing the "owner" of the inherited stuff even more. Other times this happens is when a person mixes inherited $$$ with regular money (by not depositing inheritance check in own personal account, but throws in joint account, etc).
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Old 10-07-2022, 10:55 AM   #4
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Inheritance, including inherited IRA, are usually kept by whoever owns it in a divorce because it is not money made during the marriage. IRAs can be transferred to the other spouse in a divorce without tax consequence. Brokerage houses can do that with supporting legal document. I don't know if the law allows inherited IRA to be moved to the other spouse in a divorce.
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Old 10-07-2022, 10:57 AM   #5
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If there are gains in the inherited IRA, she likely would have a right to half those gains. This could have been avoided if the IRA was set up to go into a trust by the deceased. But since it’s not, your attorney would be familiar with your state laws regarding this.
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Old 10-07-2022, 11:08 AM   #6
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I need to clarify...

Let's say the 401k is $800k and will be split 50/50. So, $400k each. I know it's not taxed, but will be when withdrawn. And if withdrawn before retirement age one would pay taxes PLUS 10% penalty right?

So instead, one spouse gives up the Inherited IRA in lieu of the half of the 401k. Yes, it needs to be emptied in 10 years, but this way there's no 10% penalty. The one spouse was concerned about paying the extra taxes and is looking for ways to have money available now.
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Inherited IRA and divorce questions
Old 10-07-2022, 11:38 AM   #7
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Inherited IRA and divorce questions

Quote:
Originally Posted by silvor View Post
I need to clarify...

Let's say the 401k is $800k and will be split 50/50. So, $400k each. I know it's not taxed, but will be when withdrawn. And if withdrawn before retirement age one would pay taxes PLUS 10% penalty right?

So instead, one spouse gives up the Inherited IRA in lieu of the half of the 401k. Yes, it needs to be emptied in 10 years, but this way there's no 10% penalty. The one spouse was concerned about paying the extra taxes and is looking for ways to have money available now.


I doubt you’ll have to pay a 10% penalty for splitting the 401k. If there is a court order to split it, it could be rolled into an IRA for your spouse.
Talk to your 401k administrator and your attorney.
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Old 10-07-2022, 11:46 AM   #8
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401ks and IRA can be split Qdro orders in a divorce to preserve the tax status of the retirement account.
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Old 10-07-2022, 11:47 AM   #9
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I doubt you’ll have to pay a 10% penalty for splitting the 401k. If there is a court order to split it, it could be rolled into an IRA for your spouse.
Talk to your 401k administrator and your attorney.
I'm not talking about 10% for splitting. I'm talking about taking distributions early from the 401k money.

10% penalty wouldn't happen with the Inherited IRA money.
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Old 10-07-2022, 11:51 AM   #10
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I understand what you're saying and why. It's a good idea if it can be done. Ed Slott is as much of an expert on IRAs as anyone, and he says it's unclear but some are doing it.

https://www.investmentnews.com/can-i...ivorce-2-75067

I'd check with the IRA holder that they will reassign it with a court order (divorce agreement).
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Old 10-07-2022, 12:03 PM   #11
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If the parties agree, the Court would probably agree to sign off on a QDRO (Qualified Domestic Relations Order) directing the transfer of the IRA.
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Old 10-07-2022, 05:56 PM   #12
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If there are gains in the inherited IRA, she likely would have a right to half those gains. This could have been avoided if the IRA was set up to go into a trust by the deceased. But since it’s not, your attorney would be familiar with your state laws regarding this.
How assets get divided in a divorce is heavily dependent on state law.

Here an inherited IRA (and any gains within) is separate property.

I assume the OP is talking about a voluntary split as part of the property settlement, or for the non-owner to waive alimony.
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