Individual Retirement Accounts (IRAs) in Divorce

This guide outlines the procedure for transferring Individual Retirement Accounts (IRAs) during a divorce. Unlike employer-sponsored plans, IRAs do not require a QDRO.

The Transfer Process

To avoid taxes and penalties, the transfer must be handled as a “Trustee-to-Trustee” transfer.

• Identification: The Judgment must clearly identify the financial institution, the account holder’s name, and the last four digits of the account.
• Valuation: Specify the award as either a fixed dollar amount or a percentage as of the date of transfer.
• Tax Status: The receiving IRA must be of the same tax type (e.g., Traditional to Traditional, or Roth to Roth).
• Execution: Never let the financial institution make a check payable to either party. It must be made payable directly to the receiving IRA account.

Pro-Tip: Transfers are significantly faster and easier if both parties have accounts at the same financial institution. Many banks (like Fidelity, Vanguard, or Schwab) have their own specific “Divorce Transfer” forms.

Pitfalls: Annuity or Variable Annuity IRAs

Annuity IRAs (often from companies like Prudential, MetLife, or Jackson National) are insurance products that carry unique risks during a division.

• Deferred Sales Charges: There is often a steep fee for transferring or dividing these annuities.
• Lost Guarantees: Dividing the account may cause the loss of guaranteed returns or “riders” that made the annuity valuable.
• The “Regular IRA” Workaround: If possible, have the account holder transfer the assigned portion into a regular IRA first, then transfer that new account to the former spouse to avoid disrupting the original annuity’s structure. Transfer should be prior to the divorce so that the receiving IRA that will be assigned to the Former Spouse can be clearly identified.

Sample Separation Agreement Wording

Option 1: Fixed Dollar Award

“Party B (Account Holder) shall transfer to Party A (Former Spouse) $[Amount] from the [Financial Institution Name] IRA f/b/o [Account Holder Name] ending in [Last 4 Digits], valued as of the date of transfer. Transfer shall be made from IRA trustee to IRA trustee so no tax is triggered. The court retains jurisdiction to enter further orders if needed for this transfer.”

Option 2: Percentage Award

“