Some North Carolina residents may decide to start taking distributions on an IRA before reaching the age of 59 1/2. This normally incurs a 10% penalty, but there are certain circumstances in which it is permitted without the penalty. However, those penalties kick in again and become retroactive if the IRA is modified. If a couple decides to divorce and the IRA owner is getting these distributions, this could be considered a modification.
The applicable IRS rules are not entirely clear about this. The regulations do not specifically address this situation. One option for taxpayers is to seek a private letter ruling. However, these can be expensive and take more than a year, so it is not possible for everyone. PLRs are published publicly, but they are only supposed to be applicable to the individual case. However, when the IRS consistently rules the same way in PLRs, it may be possible to take some guidance from this. It may be best for people who have questions to consult a financial or legal professional in these circumstances.
If there are no complications, an IRA can generally be divided with a divorce decree. For other types of retirement accounts, including a 401(k), it may be necessary to get a document known as a qualified domestic relations order.
It can be particularly important for older individuals to ensure their financial security in a divorce since they do not have as many working years ahead of them to replace money lost. Negotiating an agreement for property division can be less expensive than going to court, but people should make sure they do not become overwhelmed by their emotions and rush through this process. An attorney may be able to help with negotiations to prevent this.