The division of an Individual Retirement Account (IRA) during a divorce does not require a QDRO.
Instead, details of the division should be included in a “divorce or separation instrument” which can be any of the following according to IRC §121(d)(3)(C):
- a decree of divorce or separate maintenance or a written instrument incident to such a decree,
- a written separation agreement, or
- a decree requiring a spouse to make payments for the support or maintenance of the other spouse.
If a transfer of an IRA occurs within one year of the divorce and is related to the cessation of the marriage, it is considered to be “incident to divorce” (see IRC §1041(c)) and, as such, is not considered a taxable transfer (see IRC §408(d)(6)).
After the divorce is finalized, the “divorce or separation instrument” should be forwarded to the IRA custodian so that the ordered division can be processed. Since administrative procedures are not uniform among all IRA custodians, it may be necessary to complete forms or provide additional information in order for the transfer to be completed.
While it is technically unnecessary, many IRA custodians will assert that a QDRO is required in order to divide an account. Though it may be tempting to challenge the assertion, you will save yourself and your client a great amount of time and expense if you simply comply and send them a QDRO.
It is critical to understand what a particular custodian requires prior to negotiating the terms of an IRA division. The details may need to be in the divorce decree, a QDRO may be required or a simple letter of instruction may suffice.