Transferring an IRA and 401(k) in a Divorce

A reader writes in, asking:

“My divorce was finalized a few weeks ago, and I am supposed to receive a portion of my ex-husband’s IRA and 401k. Are there any specific rules to follow as far as how to move the money from his accounts to my IRA? Or does he just take the money out, write me a check for the appropriate amount, and I deposit the money in my IRA?”

Yes, there are specific rules to follow. And it’s important to note that the rules are different for IRAs than for employer-sponsored retirement plans. Let’s talk about IRAs first.

Transferring IRA Assets in a Divorce

Publication 590-A speaks to transferring an IRA after a divorce. There are two key points here.

The first key point is that there are two ways to do it:

1. Change the name on the account (in cases in which the entire account is being transferred to you), or
2. Move the money via a direct trustee-to-trustee transfer, in which the money is sent directly from one financial institution to the other.

A check written to you is a problem, because it does not fall under either of these options. That is, it is not possible to do a “rollover” in which the money is sent to you, then you put it into your own IRA. It has to be a direct transfer from one financial institution to the other (i.e., from the custodian of your ex-spouse’s IRA to the custodian of your IRA).

The second key point is that the divorce decree (or a written document incident to such decree) must specifically state that you are supposed to get this interest in your ex-spouse’s IRA.

Transferring 401(k) Assets in a Divorce

The rules for an employer plan — such as a 401(k) or 403(b) — are different.

First, rather than the divorce decree needing to state that you’re supposed to get an interest in the account, it has to be a “qualified domestic relations order” (QDRO) that states that you get an interest in the account. Also, it’s critical that the order includes certain specific pieces information in order to qualify as a QDRO.

Second, with an employer plan, a rollover is possible. That is, as long as there is a QDRO ordering that you get the part of the account in question, the plan can make out a check to you, and you can then deposit it (i.e., “roll it”) into your IRA — though you only have 60 days (from the date you receive the distribution) to do so.