When people in Texas get a divorce, they may have retirement accounts to divide. Certain types of retirement plans must be split using a document called a qualified domestic relations order. A marital separation agreement or divorce decree is necessary when splitting an IRA. While this is normally a straightforward process, if the person who owns the IRA has been taking 72(t) distributions, there might be complications.
People are not supposed to take distributions from an IRA until they reach the age of 59 1/2. There are a few exceptions in which it is permitted, such as distributions to pay for certain medical or educational expenses. However, if there is a modification to the account, there is a retroactive 10% penalty on the distributions. According to IRS regulations, splitting an account in a divorce appears to fit the definition of a modification.
When a point of tax law is unclear, individuals can seek what is known as a private letter ruling. These are public but are only supposed to apply to the individual’s case. In PLRs about this issue, the IRS has not penalized individuals. It is impractical for many people to seek PLRs due to their cost and the time it takes, so people with 72(t) distributions who are getting a divorce may want to consult a financial professional.
In a community property state like Texas, couples are supposed to split property equally in a divorce. One alternative to dividing a retirement account might be for one person to keep the retirement account and the other to keep a piece of property of similar value, such as a home. Costs such as taxes on distributions from the retirement account or upkeep on the home should be taken into account when comparing these values.