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Splitting an IRA account in a gray divorce

The number of divorces in California and around the country involving spouses over the age of 50 has increased significantly in recent years even though the overall divorce rate has remained fairly consistent. IRA and 401(k) accounts are usually among the most significant assets divided in a gray divorce, and dealing with them is often difficult because of strict regulations and complex tax laws that were drafted to deter individuals from plundering their retirement savings.

Individuals who take money from their IRA accounts before reaching the age of 59 1/2 pay a 10% penalty as well as income tax on the withdrawn funds. Exceptions are made if retirement savings are used to purchase a first home, pay medical bills or cover educational expenses like college tuition. Individuals can also avoid the 10% penalty if they choose to retire early. These are known as 72(t) distributions. However, the 10% penalty is applied retroactively and a late interest penalty is also assessed if early retirement withdrawals are not made on a regular basis for at least five years.

The tax code makes clear that deviating from this schedule will trigger the penalties, which would appear to make the division of IRA funds in a divorce quite costly if 72(t) distributions are being made. However, the IRS has allowed divorcing spouses in this situation to avoid the penalties by issuing what are known as Private Letter Rulings. Obtaining a PLR from the IRS can take a year or longer and cost more than $10,000, but most experts believe that divorcing spouses do not need to seek one as the IRS has already issued several rulings on the issue.

Other assets that can be difficult to divide in a gray divorce include investment portfolios and business interests. When confronted with these issues, experienced family law attorneys may ask experts such as retirement planners and investment advisers to explain the various options available and their potential ramifications so that divorcing spouses can make wise and informed decisions.

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