Dividing IRAs in Divorce

Why IRAs are simpler to divide – but still easy to mess up

Here’s the good news about dividing IRAs in divorce: you don’t need a QDRO, that complicated court order required for 401(k)s and pensions. The division process is more straightforward, the timeline is faster, and there are fewer opportunities for plan administrators to reject your paperwork.

But here’s what I tell every couple in my mediation practice: simpler doesn’t mean simple. I’ve seen people botch IRA transfers and trigger massive tax bills they never saw coming. I’ve seen couples split traditional IRAs while overlooking that one spouse has a Roth IRA worth three times as much post-tax. The mechanics might be more straightforward, but you can still make expensive mistakes if you don’t know what you’re doing.

The key is understanding that traditional IRAs and Roth IRAs are fundamentally different animals, even though they’re both called IRAs. The tax treatment differs entirely, which means a dollar in a traditional IRA is not worth the same as a dollar in a Roth IRA. This matters enormously when you’re trying to divide retirement assets fairly.

The transfer incident to divorce: how it actually works

When you’re dividing an IRA, you’re doing what’s called a “transfer incident to divorce.” The IRS allows this transfer to happen tax-free when you follow the process correctly. Break the rules, even accidentally, and you could owe income taxes plus penalties on the entire amount.

Your divorce decree or settlement agreement specifies that a specific dollar amount or percentage of one spouse’s IRA will be transferred to the other spouse’s IRA. Once the divorce is final – and this timing matters – the spouse transferring money contacts their IRA custodian with a copy of the divorce decree and instructions to transfer the specified amount directly to the other spouse’s IRA.

The transfer has to go directly from one IRA to another. If the money comes to you as a check made out to you personally, the IRS might treat that as a distribution, meaning you’d owe taxes and potentially a 10% early withdrawal penalty if you’re under 59½. Most major IRA custodians handle these transfers routinely. The process isn’t complicated when you follow their procedures, but you need to follow them exactly.

Traditional IRAs versus Roth IRAs: understanding the massive difference

This is where couples get into trouble. They see that one spouse has a $100,000 traditional IRA and the other has a $100,000 Roth IRA, and they figure they’re even. They’re not even close.

A traditional IRA contains pre-tax money. Every dollar you eventually withdraw gets taxed as ordinary income in retirement. If you’re in a 25% tax bracket in retirement, your $100,000 traditional IRA is really worth $75,000 after taxes – and possibly less if you’re in a higher bracket.

A Roth IRA contains post-tax money. You’ve already paid taxes on the money before it went in, so qualified withdrawals in retirement come out completely tax-free. That $100,000 Roth IRA is actually worth $100,000 in retirement spending power.

When mediating cases involving both traditional and Roth IRAs, we ensure couples understand this distinction. If you’re dividing retirement accounts equally, you can’t just split each account 50/50 without considering the tax differences. You need to either adjust the division percentages or offset with other assets to account for the fact that traditional IRA dollars are worth less than Roth IRA dollars.

Here’s a real example from my practice

A California couple we mediated with had $400,000 in traditional IRAs combined and $200,000 in Roth IRAs, for a total of $600,000. They initially planned to each take half of everything – $200,000 in traditional IRAs and $100,000 in Roth IRAs. That split would have been equal after taxes, with each spouse getting $250,000 in after-tax value.

However, the husband wanted more of the tax-free Roth money and was willing to take less of the traditional IRA to achieve this. We worked through the math assuming a 25% effective tax rate in retirement. We adjusted the split to give him $120,000 of the Roth and $173,000 of the traditional, while the wife got $80,000 of the Roth and $227,000 of the traditional. Even though the dollar amounts looked unequal, they each still ended up with exactly $250,000 in after-tax value – showing how mediation lets you customize the split to match your preferences while staying fair.

These kinds of customized solutions only happen in mediation. In litigation, you’re stuck with rigid formulas and a stranger making decisions about your financial future. In mediation, you maintain control and can structure arrangements that actually work for your situation.

Timing matters more than you might think.

You cannot execute an IRA transfer until your divorce is final. The divorce decree needs to be signed and entered. If you try to transfer IRA money before that happens, the IRS won’t treat it as a transfer incident to divorce. Instead, it might be considered a taxable distribution followed by a gift. That’s a tax disaster.
Wait until you have a final divorce decree. I know it’s frustrating to wait, especially if you’re worried your spouse might drain accounts. But triggering an unnecessary tax bill because you moved too fast is worse.

Once the divorce is final, execute the transfer relatively promptly. Don’t let years go by. The longer you wait, the more likely it is that something goes wrong – account values change, people forget the agreed amounts, someone remarries, and things get complicated.

SEP-IRAs, SIMPLE IRAs, and rollover considerations

If either spouse is self-employed or works for a small business, they might have a SEP-IRA or SIMPLE IRA. These can be divided using the transfer incident to the divorce process, just like regular IRAs. The bigger issue is timing restrictions on SIMPLE IRAs – money in a SIMPLE IRA typically can’t be rolled over to a traditional IRA until it’s been in the SIMPLE for at least two years.

Sometimes one or both spouses have a 401(k) from a previous employer that they plan to roll into an IRA. Should you do that before or after the divorce? If you roll a 401(k) into an IRA before the divorce is final, the IRA is divided using the more straightforward transfer process rather than a QDRO. But you lose the option for the receiving spouse to take advantage of the QDRO exception to the 10% early withdrawal penalty.

If the non-employee spouse wants to take money out now and is under 59½, keeping it in the 401(k) and using a QDRO might be better. If both spouses plan to leave the money invested for retirement, rolling to an IRA first could simplify the division. These are judgment calls that depend on your specific situation.

Why IRA division works well in mediation

Dividing IRAs doesn’t require the complex court orders and lengthy approval processes that 401(k)s and pensions do. That’s good news. But the simplicity of the process can lull people into thinking they don’t need expert guidance, and that’s where mistakes happen.

The difference between a traditional IRA and a Roth IRA from a tax perspective is significant enough that getting this wrong can cost you tens of thousands of dollars. Incorrectly timing the transfer can trigger tax consequences you never anticipated. Overlooking beneficiary designations or failing to coordinate with other retirement account divisions can create problems that don’t surface for years.

In mediation, we take the time to do this right. We identify all the accounts, understand their characteristics, think through the tax implications, and structure a division that’s truly equitable even when the account types differ. We execute the transfers correctly and on schedule, with clear documentation that protects both spouses.

Working with financial expertise makes a difference

Here’s what I’ve learned through 17 years of mediating divorces: IRAs might be easier to divide than other retirement accounts, but the tax implications and valuation differences between account types create complexity that demands financial expertise.

My background in finance allows us to navigate this complexity together. We can model different scenarios: What if you take more of the traditional IRA and your spouse takes more of the Roth? What if we offset the IRA against home equity or other assets? How do state income taxes factor into the equation if one of you is moving to a different state? If your income includes stock options, RSUs, or other equity compensation flowing into retirement accounts, we can cut through that complexity to find clear answers.

The flexibility of mediation really shines when you’re balancing retirement assets with different tax treatments. In litigation, you’re typically stuck with a rigid 50/50 split of each account, whether that makes sense for your situation or not. In mediation, we can structure arrangements that are equal in value even when the dollar amounts differ, or that grant one spouse more control over certain assets in exchange for something else that matters more to them.

We don’t just handle the immediate mechanics of your divorce. We help you think ahead about your financial future, anticipate how changes in circumstances might affect your retirement planning, and build agreements that give you confidence as you move forward. You’re not figuring this out alone or hoping you didn’t miss something important – you have active guidance through every decision that affects your financial security.

Your IRAs might be the easiest retirement assets to divide, but that doesn’t mean they’re not worth taking seriously. The choice between mediation and litigation here is clear: mediation gives you control, flexibility, and the benefit of working with someone who understands the financial intricacies. Litigation hands your decisions to someone who doesn’t know your situation and applies rigid rules that might not serve either of you well.

Make informed decisions, follow the transfer process precisely, and set yourself up for the retirement security you’ve spent years building.