Given that your IRA may be crucial to your retirement, every cent will probably count when it comes to dividing the account with your spouse in your divorce. You should not lose more money than necessary from tapping into your IRA to satisfy a property division.
It is important to understand how to ensure a successful transfer of IRA funds to your spouse while avoiding unnecessary losses to taxes and penalties.
Where you could lose money
One way to divide your IRA is to simply remove an amount from the account and give it to your spouse. However, Kiplinger explains that the federal government will tax this withdrawal. Additionally, if you are younger than 59.5 years old, you will incur a 10% penalty.
A tax-efficient method of division
To prevent taxes and penalties, your divorce or separation agreement should establish that part of your IRA will transfer directly into a separate IRA owned by your spouse. You may divide your IRA by amount or percentage.
Your spouse could risk penalties by taking cash from the new IRA if he or she is below the age of 59.5. Creating a Roth IRA for your spouse might minimize taxes since Roth cash withdrawals tend not to incur taxes.
Keep taxes in mind during the division process
According to a CNBC article, it is important to factor in future taxes when dividing an IRA. If your spouse receives a certain amount in cash and you retain that same amount in your IRA, you will likely have to pay taxes on your funds in the future.
To stand a good chance of preserving your retirement, you should know all the ways you could incur expenses before you withdraw money from your IRA or other accounts.