I’m transferring some of my interest in an IRA to my spouse. How do I do this in FL?

“I’m transferring some of my interest in an IRA to my spouse in our divorce agreement. How should I go about doing this?”

Spouse’s pension benefits are often part of a property settlement. When this is the case, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order (QDRO).” A QDRO gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they are paid out to the other spouse.

A QDRO isn’t needed to split up an IRA, but special care must be taken to avoid unfavorable tax consequences. For example, if an IRA owner were to cash out his IRA and then pay his ex-spouse her share of the IRA as stipulated in a divorce decree, the transaction could be treated as a taxable distribution (possibly also triggering penalties), for which the IRA owner would be solely responsible. However, the taxes and penalties can be avoided, if specific IRS-approved methods for transferring the IRA from one spouse to the other are used. For example, money can be transferred tax-free from one spouse’s IRA to the other spouse’s IRA in a trustee-to-trustee transfer, as long as the transfer is required by a divorce decree or separation agreement. Also, the transfer shouldn’t take place before the divorce or separation is final, or it may be treated as a taxable distribution.

Phil Shechter is a Certified Public Accountant (CPA) and senior partner at Berenfeld in Miami. He has been practicing accounting since 1982.