Division of an Individual Retirement Account (IRA) during 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, is it considered to be “incident to divorce”, IRC §1041(c) and, as such, is not considered a taxable transfer, 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.
There are many IRA custodians who will require a QDRO in order to divide a participant’s IRA account. While this technically inaccurate, you will save yourself and your client a great amount of time and expense by simply succumbing to their demand.
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 maybe required or a simple letter of instruction may suffice. We can help. We maintain and extensive plan database and can let you know what will be involved in dividing the IRA you are dealing with.