When money is taken out of an IRA, it is subject to income taxes, and it may also be subject to a 10 percent early withdrawal penalty. This penalty still applies even if a California resident makes a withdrawal pursuant to a divorce decree. To avoid paying the 10 percent early withdrawal penalty, the money should be sent directly to the other person’s IRA.
Assuming that the money stays in an IRA, neither party will experience a taxable event. However, if money is then taken out of either party’s IRA for any reason, normal tax and penalty rules apply. It is important to note that there is no such thing as a QDRO for splitting an IRA. A QDRO only applies when splitting a company-sponsored plan.
When splitting an IRA, it may be a good idea to meet with a financial adviser as well as with a divorce attorney. This may make it less likely that an individual incurs any penalties or has to pay taxes after the account is divided. It is also important to understand that the transfer cannot happen until the divorce is finalized regardless of what its terms are.
If an individual has any questions about splitting retirement plans or any other assets, an attorney may be able to answer those questions. He or she may also be able to recommend outside sources who may be better equipped to do so. When dividing an IRA, it may be possible to time a transfer or withdrawal to minimize the tax and other possible financial implications.