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IRA Received in Divorce

By Terry Savage on September 13, 2021 | Financial Planning / Retirement

Hi Terry,
I just got a traditional IRA from my ex-husband. How do I transfer it and liquidate all the assets without paying the 10% penalty. A QDRO wont help me, but I found this article. According to the article, would an amendment to my divorce agreement from QDRO to “Incident of Divorce” regarding the IRA would help me? please let me know your thoughts. Many Thanks in advance!

Link:
https://financialducksinarow.com/9176/qdro-vs-transfer-incident-to-a-divorce/

Section of the article:
“The major difference between a QDRO and a transfer incident to a divorce is that a transfer incident to a divorce does not allow for the receiving ex-spouse to receive the funds penalty-free if not rolled over into a receiving IRA. With a QDRO, although the funds are taxable to the receiving ex-spouse, there is no 10% penalty if the funds are withdrawn prior to his or her reaching age 59½. If the originating account is an IRA, the 10% early withdrawal penalty will apply in addition to ordinary income tax.”

Terry Says

First, let me make a suggestion you don’t seem to have considered. DO THE ROLLOVER and DON’T WITHDRAW THE FUNDS! You will never again in your life get this boost for retirement savings. Clearly you are under 59 since you are worried about the penalty. So just let the account keep growing over the coming years (invest conservatively in an “equity/Income” fund at a place like Fidelity or Vanguard). They will help you do the rollover. That way you don’t pay the penalty and get all that tax-deferred growth!

Second, you’ll have to consult a lawyer about recharacterizing the terms of your divorce. I think you are courting trouble from the IRS either way. Take this GIFT (ok, a payment for your service over the years) and make it work FOR you. Contact Fidelity or Vanguard and let them handle the transfer to avoid taxes.

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