Tax Brake with Robert G. Nath, Esq.

The normal rule is that when you tap your IRA or transfer it, that's a taxable event. Divorcing couples usually don't want that result, so Section 408(d)(6) of the Internal Revenue Code provides that the transfer of an interest in an IRA (or an individual retirement annuity) to a spouse or former spouse is not treated as a taxable transfer. However, there are conditions (so what else is new?)

The transfer must be “under a divorce or separation instrument” described in another Code section. That section includes a “decree of divorce or separate maintenance or a written instrument incident to such a decree.” (Confused? Hey, that's your tax code!) In plain(er) English, this means you must have a divorce decree, a decree of separate maintenance, or another written instrument that relates to either of these two. If the IRA is transferred pursuant to a “separation agreement”, that does not qualify and the transfer will be taxable. If the IRA is transferred under anything else, that's taxable also.

You might consider including language from the Internal Revenue Code as shown above in your instruments, just to be on the safe side. In fact, in several cases failure to do this resulted in taxation. In one case, the husband titled an IRA in his wife's name pursuant to a “private” written separation agreement but the couple was not really contemplating divorce. Bad news. The agreement was therefore not “incident” to divorce, and it was taxed. Another way to help is to make sure that at some point, a divorce decree is actually entered, or that transfer is made after finalizing the divorce. Many divorces stretch out over years, and if your IRA is transferred in Year 1, it could be Year 3 before it's all finalized.

If you meet these tests, then the IRA becomes the IRA of the receiving spouse, and the normal IRA rules apply. That means if the receiving spouse uses it, the proceeds are taxable - to that spouse.

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