Transferring IRA Interests
Interests in your traditional individual retirement account (“IRA”) or that of your spouse may be made per Internal Revenue Service (“IRS”) guidelines when the transfer is incident to a divorce. The transfer is tax free.
There are two commonly-used methods of transferring IRA assets to a spouse or former spouse. You can change the name of the existing IRA account or you can make a direct transfer of IRA assets from one account to another.
In the event you are transferring the entire balance of your IRA to your spouse (or vice versa), you can direct the trustee of the IRA to simply change the name on the account to the party who has been awarded the account.
If you have agreed or been ordered to split your IRA assets, you should make a direct transfer. When you make a direct transfer, you simply direct the trustee of the traditional IRA to transfer the assets directly to the trustee of a new or existing traditional IRA set up in the name of your spouse or former spouse.
Generally, the organization administering your IRA will be able to provide you with the paperwork necessary to effectuate these transfers so you will not need your attorney to prepare a separate domestic relations order for you. However, the documents can be confusing and your attorney should assist you in completing them so that they accurately reflect the terms of your decree.
Dividing Your Dependency Exemptions
The IRS’s rule of thumb is that custodial parent gets to claim all dependents every year. The IRS defines the custodial parent as the parent with whom the child resides for the greater number of nights during the calendar year. The noncustodial parent is the parent who is not the custodial parent. If a child resides with each parent for an equal number of nights during the calendar year, the parent with the higher adjusted gross income for the calendar year is treated as the custodial parent.
You and your former spouse, however, have probably agreed to a different set of rules, either agreeing to alternate your child for tax purposes every other tax year or agreeing to divide the exemptions between the two of you if have more than one child.
The IRS guidelines control in situations like these. The IRS is very clear that a state court order or decree does not allocate the federal exemption between parents. While you can ultimately request your state court to enter contempt citations, sanctions and attorneys fees if he/she fails abide by the divorce decree, this can be a time consuming process with no guarantee you will be made whole. The IRS will not assist you if your former spouse meets the IRS guidelines for claiming the exemption.
The best way to protect yourself is to be proactive. If your former spouse qualifies as a custodial parent under IRS guidelines, require him/her to execute IRS Form 8332 prior to January 31 each tax year in which you are to claim your minor child. Once the exemption has been released, he/she will be unable to qualify as a custodial parent under IRS guidelines.
If you have any insurance policies, retirement accounts or accounts listing your former spouse as the beneficiary, you need to contact the plan provider to update your beneficiary and remove your former spouse. The divorce decree alone does not act to change your beneficiaries.
If you are still in the final phases of negotiation, make sure there is a provision in your decree that requires you and your spouse to expeditiously execute any necessary documents.
Tiffany A. McFarland is a Senior Associate with Cordell & Cordell, P.C., in Overland Park, Kansas. Ms. McFarland practices exclusively in the area of domestic relations. Mrs. McFarland is licensed in the state of Missouri and the state of Kansas and is certified as a Guardian ad Litem.