Michigan Family Law and Dividing an IRA

Often times in divorce cases IRAs need to be equalized. Clients always worry about tax counsequences. That is why it is always important to get the Client's CPA involved. But an IRA transfer does not have to have tax consequnces for parties that are getting divorced.

The tax treatment/distribution rules distinguish inherited IRAs from regular IRAs, but the assignment of an IRA, or portion thereof, to a former spouse pursuant to divorce is the same. The transfer is a tax-free transfer under IRC 408(d)(6). I'm pretty sure the tax treatment follows the IRA and the new owner-former spouse takes the IRA with the characterization the IRA had before it was transferred to her/him.

BTW, a QDRO is not the correct mechanism for the transfer of an IRA. QDROs are for ERISA qualified plans (employer sponsored tax advantaged plans under certain sections of the IRC; 401 et al).

Normally the IRA Custodian will require a copy of the JOD and certain of their own forms. However, sometimes a letter of instruction and other letters are required. Still other times a DRO is the best solution. Such DRO is similar to a QDRO, but cites different statutes and contains different terminology and terms of art.

It is important to first contact the IRA custodian to see what documents are needed to make the transfer so that there are no tax consequences.