Protecting What You Value Most

IRAs, 72(t) distributions and divorce

by | Jan 23, 2020 |

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.