IRA Tax Question [Split Due to Divorce]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
JimHalpert
Posts: 212
Joined: Fri Apr 25, 2008 1:34 pm

IRA Tax Question [Split Due to Divorce]

Post by JimHalpert »

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.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: IRA Tax Question

Post by Alan S. »

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.
User avatar
SSSS
Posts: 1914
Joined: Fri Jun 18, 2010 11:50 am

Re: IRA Tax Question

Post by SSSS »

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.
FillorKill
Posts: 1007
Joined: Sat Aug 06, 2011 7:01 am

Re: IRA Tax Question

Post by FillorKill »

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. :(
User avatar
LadyGeek
Site Admin
Posts: 95703
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: IRA Tax Question

Post by LadyGeek »

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

Please stay on-topic.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
HueyLD
Posts: 9790
Joined: Mon Jan 14, 2008 9:30 am

Re: IRA Tax Question

Post by HueyLD »

..............
Last edited by HueyLD on Sun Feb 08, 2015 7:58 pm, edited 1 time in total.
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: IRA Tax Question

Post by Alan S. »

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.
Gill
Posts: 8221
Joined: Sun Mar 04, 2007 7:38 pm
Location: Florida

Re: IRA Tax Question

Post by Gill »

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.
Bruce
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
Post Reply