IRA Tax Question [Split Due to Divorce]

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IRA Tax Question [Split Due to Divorce]

Postby JimHalpert » Thu Feb 14, 2013 1:30 pm

I hope one of you resident tax experts can help me with this.

I have an IRA that has a tax basis. My wife and I are divorcing. We are going to split the IRA. Does the tax basis also get split in the same ratio as the the value of the IRA or can we allocate it as we see fit? I would like to split the IRA 50% - %50%, but I would prefer to give her the entire tax basis if this is possible.

Thanks.
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Re: IRA Tax Question

Postby Alan S. » Thu Feb 14, 2013 5:12 pm

Jim,
It's probably not worth the potential hassle in trying to do this. While there is no clear IRS Reg that specifies mandatory pro rating of IRA basis in a divorce transfer, there IS such a pro rate requirement for basis in qualified plan transfers under a QDRO. While IRA transfers are NOT subject to QDRO rules, there is a decent chance of the IRS objecting if you both filed updated 8606 forms resulting in your entire basis transferring over to her IRA. There is also a potential issue if the divorce agreement specified that she receive 100% of your IRA basis and the IRS did not agree when the 8606 forms are filed. That said, you could take an aggressive posture and see what happens as long as you are prepared for possible IRS denial of non pro rated treatment of the basis.

I do find the wording in the line 7 instructions of the 8606 instructions to be interesting. It says "if the transfer results in a change of basis for EITHER spouse" et al. Why does it indicate "either spouse" when any transfer with basis pro rated would have to affect BOTH spouses. The only way both spouses would not be affected would be if the transferring spouse retained 100% of the basis, and that of course could not happen with pro rating. Of course, the wording in various IRS publications is not necessarily conclusive.

If I come across any IRS letter ruling on this subject, I will post back.
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Re: IRA Tax Question

Postby SSSS » Thu Feb 14, 2013 6:18 pm

JimHalpert wrote:My wife and I are divorcing.


Looking at your username... I should be shocked, but the foreshadowing has been pretty thick all season.
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Re: IRA Tax Question

Postby BBL » Thu Feb 14, 2013 6:25 pm

SSSS wrote:
JimHalpert wrote:My wife and I are divorcing.


Looking at your username... I should be shocked, but the foreshadowing has been pretty thick all season.


Yes, how sad. I thought Jim & Pam would make it. Guess not. :(
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Re: IRA Tax Question

Postby LadyGeek » Thu Feb 14, 2013 6:28 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).

Please stay on-topic.
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Re: IRA Tax Question

Postby HueyLD » Thu Feb 14, 2013 9:45 pm

Here is what IRS Pub 590 says about IRA transfers incident to divorce:
Transfers Incident To Divorce

If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For information about transfers of interests in employer plans, see Distributions under divorce or similar proceedings (alternate payees) under Rollover From Employer's Plan Into an IRA, earlier.

Transfer methods. There are two commonly used methods of transferring IRA assets to a spouse or former spouse. The methods are:

•Changing the name on the IRA, and

•Making a direct transfer of IRA assets.


Changing the name on the IRA. If all the assets are to be transferred, you can make the transfer by changing the name on the IRA from your name to the name of your spouse or former spouse.

Direct transfer. Under this method, you direct the trustee of the traditional IRA to transfer the affected assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse. If your spouse or former spouse is allowed to keep his or her portion of the IRA assets in your existing IRA, you can direct the trustee to transfer the assets you are permitted to keep directly to a new or existing traditional IRA set up in your name. The name on the IRA containing your spouse's or former spouse's portion of the assets would then be changed to show his or her ownership.

Caution:
If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form.

Of course your attorney should be able to give you more specific advice regarding retirement asset split.
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Re: IRA Tax Question

Postby Alan S. » Thu Feb 14, 2013 11:17 pm

Caution:
If the transfer results in a change in the basis of the traditional IRA of either spouse, both spouses must file Form 8606 and follow the directions in the instructions for that form.


That's the problem. The instructions for Form 8606 only explain how to REPORT the basis allocation between the parties. It does not explain how the basis allocation must be determined.

For a Roth IRA, the equivalent question would be whether the Roth could be partitioned in any manner other than pro rata, eg having the petition assign all the earnings to one party. That's even more unlikely to fly with the IRS since there would be no 8606 tracking until distributions were taken.
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Re: IRA Tax Question

Postby Gill » Fri Feb 15, 2013 7:22 am

JimHalpert wrote:...I would prefer to give her the entire tax basis if this is possible.

Thanks.

Why? It's to your advantage to keep as much of the basis as possible.
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