Divorcing couples in Illinois have to navigate a lot of rules when splitting their retirement assets. Whether the couple is splitting an account down the middle or transferring it to one party, there are steps to getting the desired end result.
IRAs and taxes
A traditional independent retirement account (IRA) has specific tax rules and fees. For example, withdrawing funds before reaching 59 and a half years old counts as an early withdrawal. An early withdrawal comes with a penalty fee and requires the recipient to pay taxes on the withdrawal.
To avoid these taxes and penalties, divorcing couples can set up a trustee-to-trustee transfer, also known as a direct transfer. This splits the IRA into two retirement accounts, one for each spouse. This works in situations where neither spouse is attempting to withdraw the money but split the asset so they can use it for retirement later in life. Many couples choose to consult a financial expert as they go through the trustee-to-trustee transfer process. A consultant can help nail down the finer details for the success of the trustee-to-trustee transfer.
This is an easy step to overlook, but an essential one. When you are going through the process of transferring the IRA, also make sure to update the names of the beneficiaries on the retirement account. If not, it is likely that the account will have your ex-spouse named. Your divorce decree does not mean your ex-spouse wouldn’t inherit the IRA if their name is on the paperwork as a beneficiary.
Splitting an IRA during a divorce has only a few steps, but they are important ones. With an asset as important as a retirement account, it’s good to be clear on exactly what you want to see happen with the account before the process begins.