Getting divorced? Do you or your spouse have an IRA whether a Roth or a traditional IRA? You may be wondering what is the best way to handle splitting up the IRA in your divorce settlement. We were wondering about that too, which is why we contacted CPA Barry Picker who was interviewed for an article in this month’s AARP Magazine for some insights about IRA’s and divorce. While Mr. Picker admits that he doesn’t get into the divorce business too much, the following is an excerpt of an interview Divorce Saloon had with Mr. Picker:
Divorce Saloon: Hello, Mr. Picker. Great to chat with you. We hear you are the IRA guru of Brooklyn?
Barry Picker: So I’ve been told.
Divorce Saloon: We are humbled that you have taken the time to chat with us we know you are very busy. We don’t want to take up too much of your time so let’s get to the chase. Let’s start by getting a quick primer on the differences between a Roth IRA and a traditional IRA
Barry Picker: Traditional IRAs are tax deferred, which means no tax until you withdraw money, but then there is tax. Roth IRAs, if operated properly, are tax free. That means no tax even when you withdraw money, as long as the withdrawal is after age 59½, or an inherited account, or the account holder is disabled. Also, the Roth IRA has to have been in existence for over five years for tax free withdrawals.
Divorce Saloon: Mr. Picker have you ever had to advise someone involved in a divorce where an IRA or other retirement account was at issue? If so how common is this situation in your practice?
Barry Picker: We have advised people in these cases, but thankfully not too often. I don’t have to tell you that divorces are not fun times.
Divorce Saloon: Quite. However, we understand that there are certain changes in the tax laws this year if people convert an IRA to a Roth or if they withdraw funds from either. What is/are the main change(s) that people should be aware of particularly if they are making withdrawals?
Barry Picker: The main change this year is the ability of anyone to convert their traditional IRA into a Roth IRA. Until this year, there were income limitations which restricted who could do this conversion. Now there are no limitations.
Divorce Saloon: What is the single most important thing an individual should know about their IRA and Divorce?
Barry Picker: Single most important thing is the proper way to divide an IRA in a divorce, so that there is no current taxation.
Divorce Saloon: Can you elaborate on that a little? What is the proper way to divide an IRA in a divorce so there is no current taxation?
Barry Picker: The tax code provides that in the case of a divorce, all or part of an individual’s IRA can be transferred to the spouse as part of the divorce decree or settlement agreement. This is done by dividing the IRA, if part is to be transferred, and transferring that part to an IRA in the name of the spouse. If properly done, there is no tax on the division. However, many times, an individual withdraws the IRA to give to the spouse. This withdrawal is a taxable event.
Divorce Saloon: Okay. Now, specifically in the context of divorce, what would you say to someone under the age of 59 1/2 who is divorcing this year and has to make a withdrawal from an IRA — whether traditional or Roth — to pay a spouse in a settlement?
Barry Picker: DON’T. If you withdraw from a traditional, you will be taxed. If from a Roth, you lose future tax free growth. Instead have the divorce settlement require that the IRA be split into two accounts, and transfer part to the spouse.
Divorce Saloon: That sounds like very good advice. But should the recipient spouse decide to invest the proceeds from the withdrawal by their former spouse into an IRA of his or her own, would you recommend a Roth or traditional IRA? And why?
Barry Picker: Recipient spouse cannot put the money into an IRA, unless there is a split in the IRA and recipient gets their share. It will be the same flavor of IRA that it had been before the split. If the recipient gets a traditional IRA, recipient can then decide whether to convert it to a Roth.
Divorce Saloon: I see. Upon divorce would you recommend that a retiree over the age of 59 1/2 convert their traditional IRA to a Roth? Why or Why not?
Barry Picker: That’s a tough one to answer. Each situation is different and it depends on the individual circumstances. Some would be better off doing a full conversion, some might be better off doing a partial conversion, some should leave it as it is. Definitely no one answer fits all.
Divorce Saloon: thank you for taking the time to speak with us.
Barry Picker: it’s been a pleasure.
|Barry C. Picker, CPA/PFS, CFP® is a Certified Public Accountant with the Personal Financial Specialist designation from the AICPA. He is also a Certified Financial PlannerTM licensee, and has a Masters of Science in Taxation from Pace University.Barry is a member of the New York State Society of CPA’s Estate Planning, Employee Benefits, and Personal Financial Planning Committees and has written numerous articles and taught seminars on tax and IRA related topics. He has appeared on radio and television and has been quoted in numerous publications, including Fortune, Worth, The Wall Street Journal, Investors Business Daily, New York Times, and Newsweek.Barry is the author of Barry Picker’s Guide to Retirement Distribution Planning and the Technical Editor of 100+ Roth IRA Examples & Flowcharts|
If you have questions about your IRA whether you are getting divorced or not, you can contact Mr. Picker here:
Barry C. Picker, CPA/PFS, CFP®
Picker & Auerbach, CPAs, P.C.
1908 Avenue O
Brooklyn, NY 11230
Author, “Barry Picker’s Guide to Retirement Distribution Planning”