Dividing an IRA in Divorce (No QDRO Needed)

A QDRO is a specific creature of federal law for employer-sponsored retirement plans - the mechanism in 26 U.S.C. 414(p) and 29 U.S.C. 1056(d)(3). Those rules govern plans like 401(k)s and pensions. They do not apply to IRAs.

An IRA is divided under a completely different statute: 26 U.S.C. 408(d)(6). It treats the transfer of an IRA interest to a spouse or former spouse under a divorce decree, or a written instrument incident to that decree, as a transfer incident to divorce. So the goal is not a QDRO at all - it is the right language in your decree or agreement, plus the custodian's own transfer paperwork.

Under 26 U.S.C. 408(d)(6), a transfer incident to divorce is not a taxable event. Once the transfer is done, the portion the receiving spouse gets is treated as that spouse's own IRA going forward. The IRS describes two clean ways to do this: retitling the existing IRA into the receiving spouse's name, or a direct trustee-to-trustee transfer into an IRA in the receiving spouse's name (IRS Publication 590-A, 'Transfers Incident to Divorce').

The costly mistake is taking the money out first. If the account owner withdraws funds and hands them over instead of transferring account-to-account, that withdrawal is a taxable distribution to the owner - and if the owner is under age 59 and a half, it is generally hit with an extra 10% additional tax. The Internal Revenue Code provides no divorce exception for IRAs on that early-withdrawal penalty (IRS Publication 590-B). Move the account, not the cash.

The order should state that it divides the IRA under 26 U.S.C. 408(d)(6) as a transfer incident to divorce, identify the custodian and the account (last four digits only - full account numbers do not belong in a public court filing), and specify how much: a percentage or a dollar amount, valued as of a stated date.

It should direct a direct trustee-to-trustee transfer into an IRA in the receiving spouse's name - not a distribution or payment to either party - and confirm the transfer is intended to qualify as tax-free under 408(d)(6). It is also wise to require both parties to sign whatever forms the custodian needs, to send full account details to the custodian by separate letter, and to update beneficiary designations afterward. FreeQDRO assembles this language for you from the statute and the IRS publications.

The 408(d)(6) transfer mechanism works the same way for both a traditional IRA and a Roth IRA - the account moves tax-free into a like account in the receiving spouse's name. The practical differences come later, at withdrawal: a traditional IRA is generally taxed when money comes out, while a Roth follows its own qualified-distribution rules. Dividing the account itself does not change that character.

One paperwork note: if the transfer changes the basis of a traditional IRA for either spouse, each affected party may need to file IRS Form 8606 (IRS Publication 590-A). This is a high-level overview, not tax advice - a tax professional can confirm how it applies to your accounts.