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What to consider when splitting an IRA in a divorce

Pennsylvania residents and others who have an IRA may have to give a portion of its proceeds to a spouse in a divorce. In most cases, splitting an IRA is an easy process to complete. However, this may not be true if an individual has opted to take scheduled annual payments before reaching age 59.5. Those who opt for 72(t) distributions can access money in their IRAs without having to pay a penalty.

However, once a payment schedule has been created, it is typically not possible to modify it until a person reaches age 59.5. If the payment schedule is modified, an individual will likely need to pay the 10% early withdrawal penalty on any funds that have been distributed. Furthermore, individuals may face an additional penalty for failing to pay the early withdrawal fee in the correct year. To complicate matters for those who are attempting to split an IRA in a divorce, the IRS doesn't specifically say what a modification is.

Therefore, it is a good idea for individuals who have taken 72(t) distributions to work with a financial adviser to determine what they should do. Avoiding fees and penalties may help to preserve an IRA's current balance, which can be ideal for those who are 50 and over and looking to retire in the near future.

An attorney may be helpful for those who have questions about dividing marital property during a divorce. Even if a couple has a prenuptial agreement, they may need to be careful about how retirement accounts and other assets are divided. In some cases, it may be a good idea to hold off on actually reallocating funds in an IRA until it becomes easier or otherwise financially advantageous to do so.

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