Divorce and IRA Distributions

Division of marital property is premised on the principle that marriage is a partnership that must be untangled fully and justly when it terminates. Because marriage is a collaborative effort, the law assumes that both spouses have earned their respective shares of marital assets. There are two types of property jurisdictions in the United States: common law — or equitable distribution — and community property. Regardless of the regime or jurisdiction, some Individual Retirement Account assets are typically transferred from one spouse to another during divorce proceedings.

Community Property Jurisdictions

The United States has nine community property jurisdictions as of 2011: New Mexico, Washington, Arizona, Wisconsin, Idaho, Louisiana, Nevada, California and Texas. Under a community property regime, each spouse has a vested one-half interest in all property acquired during marriage. This includes income derived from employment that is subsequently channeled into an IRA. Distribution and division of retirement funds is generally ordered by a court during divorce proceedings. In community property jurisdictions, a court will likely decree a 50/50 split of all IRA funds.

Common Law/Equitable Distribution Jurisdictions

In equitable distribution jurisdictions — also known as common law jurisdictions — all property acquired during marriage is subject to equitable distribution upon dissolution. Today, an equitable distribution regime is virtually indistinguishable from a community property regime in terms of division of property during divorce. IRA funds acquired during marriage are the property of both spouses and are typically divided equally, as in community property jurisdictions.

IRA Distributions and Transfer Methods

Next to the marital home, pension plans are generally a couple's most valuable asset. Every jurisdiction treats an employer-sponsored retirement plan as a marital asset. During dissolution proceedings, courts may issue Qualified Domestic Relations Orders, called QDROs, for the distribution of an IRA. These orders recognize the rights of a person other than the plan's beneficiary to receive benefits under the plan. QDROs authorize pension administrators to either segregate a portion of the participant's account into a separate account for the former spouse, or pay a percentage or lump-sum portion of the benefits directly to the former spouse.

Other Considerations

In response to an increase in divorce rates, the Internal Revenue Service has set up methods to facilitate easier transfers of IRA funds. The first method is direct transfer, which allows a transfer of funds from the owner-spouse's IRA to an IRA set up for a recipient spouse. Under the direct transfer method, the court-ordered amount of funds can be transferred to a new IRA set up for the recipient spouse, while the owner spouse keeps the remaining funds in the original IRA. An alternate route is the owner can set up a new IRA for himself, transfer his court-ordered amount into the new account, and leave the remaining balance for his ex-spouse in the original IRA. The second method is referred to as "renaming." If a court finds that it would be equitable for the recipient spouse to receive all IRA funds, the recipient spouse will simply keep the original IRA and have it put in her name.