When people in Illinois are getting a divorce, they might need to divide a retirement account. This can be a complex process, and it may be more complex if the individuals are nearing retirement. Divorce is on the decline overall, but it is on the rise for people older than 50, who may have begun taking early distributions from an IRA.
Certain types of retirement plans, such as 401(k)s, require a document called a qualified domestic relations order before they can be split in a divorce. This is not necessary for an IRA. However, if a person is getting distributions from the IRA using rule 72(t), which allows for distributions under limited circumstances before reaching the age of 59 1/2, splitting the account could be considered a modification. A modification triggers a retroactive penalty on the distributions taken.
Unfortunately, the IRS guidance about whether this is considered a modification is unclear. The rule itself seems to indicate that it would be considered a modification, but the IRS has made different rulings in independent taxpayer cases. These private letter rulings, or PLRs, are not meant to be considered as precedent but only as response to individual cases. However, seeking a PLR is costly and time-consuming. Individuals in this situation may want to consult legal and financial professionals.
Having a professional draw up a qualified domestic relations order is not as costly as getting a PLR, but it can be expensive as well. One possible solution for dividing property when doing so raises complicated issues is having each person keep certain assets. For example, one person might keep the home, and the other might keep the retirement account if their values are similar. It is important in these situations to account for taxes and other expenses associated with the asset that could reduce its value.
