EP 117: I have an IRA, what are my options?

retirement-ira-split-divorce

This episode of the Divorce and Your Money Show discusses options for transferring your IRA in a divorce settlement.

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Individual Retirement Accounts (IRAs) are very common in today’s world. In fact, they are integral to many retirement plans.  There are four main types of IRAs, but the two most common are Traditional IRAs and ROTH IRAs.

For a Traditional IRA, you are contributing pre-tax dollars to an account that is tax-deferred as it grows.  Once you are over 59½ years old, you can withdraw from them. And at age 70½, you must withdraw funds.  These withdrawals are then taxed at ordinary income rates.

With ROTH IRAs, you are contributing money that has already been taxed. It can grow tax-deferred, and you can pay very little taxes on withdrawals in retirement.

While this model can seem complex, the good news is that they can be very easily split for the purposes of a divorce.  All you need is an explanatory letter and the divorce decree.

Transferring the IRA

There are three options to transfer an IRA:

  • Change the Name: You contact the company that is holding the account and provide the letter and divorce decree. Then a name-change can be executed.
  • Trustee-to-Trustee Transfer: Move the account from one institution to another.  You are not only changing the name, but also moving it from one company to another.  For example, “John Smith at Charles Schwab” is changed to “Jane Doe at Fidelity.” It is the cleanest process, as you are starting with the account in your own name at a new institution.
  • Rollover: The funds are withdrawn from one account and sent to the receiving individual. You have 60 days to take the check and deposit it to your own IRA account.  If you miss that window, you could owe lots of taxes and penalties.

The Pitfall

Settling assets can take effect several months after the actual decreed settlement.  However, investments in an IRA can fluctuate daily (as the stock market moves). Once the value of the IRA is determined for the divorce settlement, it would be wise to request that the funds be moved from equities to cash. Then you can lock in the value of the account.

IRAs can be one of the easier assets to split in a divorce.  You want to choose the best option for receiving the funds. And you want to be sure that you will receive the amount that is in the decree. Therefore, ask for those funds to be moved to cash before the stock market changes the value.

Key Learning Points

  • IRAs are very common retirement vehicles, which can be easily transferred as part of a divorce settlement.
  • All that is required to execute the transfer is an explanatory letter and the divorce decree.
  • There are three options and one subtle pitfall to be aware of:
    • In a Change of Name, the account changes from one individual to the other.
    • In a Trustee-to-Trustee Transfer, the funds move from one individual or institution to another. It can be the cleanest transfer.
    • In a Rollover, funds are distributed in the form of a check, which is made out to the benefit of the other individual.  This individual now has 60 days to deposit it into their own account, before they must pay significant taxes and penalties.
  • The Pitfall is that assets in an IRA can fluctuate with the stock market far after the value is determined in the divorce decree. Therefore, to avoid any loss in value before you receive the funds, ask for the invested funds to be moved to cash as soon as possible.

THANK YOU!

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.