Dividing IRAs tax-free in divorce

Description

Abstract: Generally, transfers of property, including cash, between divorcing spouses are considered tax-free gifts between the spouses. However, this rule does not apply to transfers of balances in IRAs. If an IRA owner withdraws funds from his or her IRA and gives it to his or her spouse, the withdrawal is taxable to the IRA owner and tax-free to the receiving spouse. Fortunately, there is an important exception to this rule — transferring an individual’s interest in an IRA to a spouse or former spouse pursuant to a divorce decree or separate maintenance agreement is not taxable to either spouse. This article offers an example of how it works.