Michigan residents may know that an IRA can be split in a divorce. However, it is important to split such an asset properly to avoid paying income taxes. First, the withdrawal must be made pursuant to a divorce decree. Therefore, money should not be taken out of an IRA before the divorce is official, even if there is an informal agreement between the parties to divide proceeds within it.
It is important to understand that a qualified domestic relations order only applies when dividing proceeds from a company-sponsored plan like a 401(k). This means that an individual is still required to pay a 10 percent early withdrawal penalty even if the account was divided properly in a divorce. Ideally, funds from one person's IRA would be transferred to the other person's IRA through a trustee-to-trustee transfer. If the funds remain in an IRA, neither party experiences a taxable event.
However, if an individual chooses to then take money out of his or her IRA, that would be a taxable event. Prior to the transfer taking place, it is important for an attorney or another qualified individual to review the divorce decree. The decree should mention how and when assets are to be transferred. If there are any questions about what the decree says, it may be a good idea to ask the court for guidance.
In a divorce, an individual may be entitled to a portion of proceeds inside an IRA or any other retirement account. However, since taking money out of a retirement plan may trigger a taxable event if not done properly, it may be worthwhile to consult with an attorney before doing so. It might also be a good idea to talk with a financial adviser or others who may understand the nuances of dividing retirement assets.