Years after the divorce was over and the papers had been signed, a doctor found himself on the wrong side of the Internal Revenue Service. He ended up in Tax Court for failure to pay taxes on $140,000 in IRA distributions he paid to his wife several years earlier in 2014. Residents who divorce in Wyoming and other states can avoid tax burdens when transferring from an IRA with the help of their legal advisor.

During a contentious divorce, the couple was fighting over custody, support, the division of assets and the transfer of funds from his IRA account. The doctor made two withdrawals, and the funds were deposited into a checking account from which payments were made to his ex-wife and her attorney to satisfy the court order. The IRS contends that there are only two ways to transfer IRA assets tax-free. The transfer must be direct and in a nontaxable transaction into an IRA with the ex-spouse’s name.

In this case, the doctor believed the exception applied to any transfer from his IRA as required by the court by the time the divorce became final. He argued that the funds were transferred out of his checking account and into the account of his ex-wife, satisfying the court order. The final decision was in favor of the IRS, and the court upheld the decision that the withdrawals were not tax-free, but regular distributions and, therefore, subject to taxes.

Divorces can be messy and sometimes complex, but the laws that apply to IRA distributions are clear and well-established. Divorce decrees should specify how assets are divided, and an advisor should assist in the transfer to comply with the terms of the decree. In Wyoming and elsewhere, it may be in one’s best interest to consult with an attorney about IRA tax-free transfers before making withdrawals.

Source: financial-planning.com, “How to split IRA retirement savings after divorce“, Ed Slott, May 15, 2018