Protecting What You Value Most

IRAs, 72(t) distributions and divorce

Divorce among older couples is on the rise even though the rate overall is dropping. Some older Texas couples may have accumulated a substantial amount of money in retirement accounts, and this may need to be divided in a divorce.

Certain types of accounts, such as 401(k)s, can only be divided if a document known as a qualified domestic relations order has been prepared. An IRA does not need a QDRO, and dividing one can be fairly straightforward. However, it has the potential to get more complicated if a person has begun taking 72(t) distributions before reaching the age of 59 1/2. Under a limited set of circumstances, these types of distributions are permitted prior to retirement age without incurring a 10% penalty. However, according to regulations, if the account is modified in any way, this penalty kicks in and becomes retroactive for all distributions. The problem is that while it appears to be a modification based on IRS regulations, when individuals have sought clarification using a private letter ruling, this has not been the case.

PLRs are not meant to apply to anyone but the individual, but seeking a PLR is not practical for everyone since it is time-consuming and costly. People in this situation may want to seek the advice of a financial professional.

There can be other complexities that arise in the process of dividing property in a high net worth divorce. Since Texas is a community property state, all marital property is supposed to be divided equally. This can mean that if one person owns a business, the other person might be owed one-half of the value of the company’s appreciation since the marriage. Some couples might agree that each of them will keep assets of a similar value instead of trying to divide all properties 50/50.