Dividing an inherited IRA during divorce

California residents who have gone through a divorce know the challenges associated with dividing property and assets. A relatively new phenomenon has added a wrinkle. It is that of dividing inherited individual retirement accounts. In truth, no one is sure if an inherited IRA can be split during a divorce. In some locations, however, this is what is already happening.

The year 2019 will bring about new alimony rules in regard to taxes. These alimony rules could mean that IRAs have a larger impact on divorce settlements. Traditional IRAs have often found themselves used as a bargaining chip during a divorce. With the idea of splitting inherited IRAs, the situation becomes more complicated.

Part of the complication comes from the fact that as of this date neither the tax code nor tax regulations consider the option of splitting an inherited IRA during a divorce. So there’s nothing official written about this. There’s nothing from the IRS saying that it can be done, nor are there any private letter rulings or court cases saying that it cannot be done.

That being said, a number of courts are allowing inherited IRAs to be divided during a divorce. When an IRA is divided, it keeps its inherited status. Additionally, the required minimum distribution schedule stays the same. The name on the IRA account is the name of the individual who inherited it. The only difference is that their ex-spouse’s name is added to the account as a new beneficiary.

Many are turning to their inherited IRAs in circumstances where they have inherited a large retirement account and want to use part of it to satisfy the property split agreed on during the divorce. It is important that both parties agree that they are going to be responsible for any future RMDs and that their responsibility is based on the percentage of the inherited IRA they keep.

A family law attorney will advise clients who are considering splitting an inherited IRA on things like what to do with shared accounts, how to divide property and how to determine the value of their assets. Legal counsel can also address other issues that may arise during the divorce process.