Divorce is on the decline for most age groups, but for people over 50, it is on the rise. Older couples in Texas who are ending their marriages may have accumulated a significant amount of shared property that needs to be divided. This could include a retirement account.
If the account is an IRA, it can be divided with a divorce decree. However, in some cases, a person may have begun taking 72(t) payments from the IRA before the age of 59 1/2. There are certain situations in which this is allowed without incurring a 10% penalty, but if the account undergoes what is known as a “modification”, the penalty will need to be paid on the distributions. From the way a modification is described in IRS regulations, it sounds as though splitting an account as part of a divorce would be considered one.
However, some people have sought clarification through a private letter ruling. This is an expensive process that can take a long time, so a PLR is a practical solution for many people. When the IRS does issue a response, it is public, but it is not supposed to be taken as general guidance. However, the IRS has shown some flexibility on this issue, and individuals may want to talk to a financial or legal professional for further advice.
When people in Texas get a divorce, property is supposed to be divided equally unless they have another arrangement, such as a prenuptial agreement. However, couples may want to negotiate an agreement for property division instead of going to court, and they do not necessarily have to divide everything 50/50. For example, if there is another asset that has a value that is roughly equal to the IRA, one spouse might keep that and the other might keep the IRA.