Splitting an Inherited IRA in a Divorce

Splitting an Inherited IRA in a Divorce

By |2018-10-08T12:02:40+00:00October 8th, 2018|Financial Planning|

There’s a new phenomenon taking place in divorce settlements. What was once sacred property and never considered as joint assets, is now being thrown into the mix as part of property distribution. Splitting inherited IRAs is a growing trend.

An inherited IRA, also known as a beneficiary IRA, is one inherited from a non-spouse. The beneficiary, no matter their age, is required to take a distribution each year just like the required minimum distribution for a traditional IRA. Money cannot be added to an inherited IRA and it cannot accept rollovers, so it has usually been considered individual property and treated as if it was acquired before a marriage and thus not part of joint assets.

The popularity of splitting an inherited IRA in divorce settlements may become more popular because of the new alimony rules that are part of the Tax Cuts and Jobs Act. Under the old system, the payor could deduct alimony payments from their taxes and the recipient claimed it as income. Alimony required in divorce decrees or separation agreements created after January 1, 2019 will no longer be deductible and the recipient won’t have to claim it as income. Divorce decrees executed before January 1, 2019 will not be affected.

Traditional IRAs have always played a part in divorce settlements and often they’ve been used as a bargaining chip. The question still remains, can inherited IRAs legally be split in a divorce? Nobody knows. There is nothing in the tax code, no IRS guidance, no private letter rulings, and no court cases that definitively address the issue. But, legally sanctioned or not, it’s being done, and it’s becoming an accepted practice. IRA custodians are accepting these split inherited IRAs, perhaps because it’s ordered in the divorce decree and the custodians are afraid of violating a court order.

When an inherited IRA is split it keeps its inherited status. The recipient becomes responsible for the required minimum distributions on what they receive. And the decedent’s name stays on the account. The only change is the name of the new beneficiary.

This is still uncharted territory without authoritative rules or guidance, so while you’re splitting from your soon-to-be-ex, don’t make a final decision to split your inherited IRA until you consult with a divorce attorney and a tax professional.