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How taxes may impact a divorce settlement

On Behalf of | Jan 25, 2020 | Divorce

Individuals in Georgia and any other state who have an IRA may have to divide it with their spouses if they get divorced. In many cases, it is relatively easy to divide an IRA. However, those who have taken 72(t) distributions may find it more difficult to do so. This is because dividing annual payments may represent a modification to the current payment schedule, and a 72(t) recipient may lose the ability to obtain these payments tax-free.

If an annual payment schedule is modified, an individual may be required to pay an early withdrawal penalty on any funds he or she has already received. Additional penalties may also apply for not paying the early withdrawal penalty in the correct year. According to the IRS, a 72(t) payment schedule cannot be modified for at least five years or until a person reaches age 59 1/2.

Under the law that created this provision, modifications occur when an IRA account balance changes or if the amount of a yearly payment changes. Exceptions are made to account for gains or losses in the account as well as for those who use the required minimum distribution method, RMD, to calculate payments. Unfortunately, the IRS does not clearly state whether dividing 72(t) distributions in a divorce settlement represents a modification to a payment schedule.

Those who have questions about how to structure a divorce settlement may want to seek the assistance of a family law attorney. This person may be able to answer questions and take other steps to help a divorcing individual obtain a favorable outcome in his or her case. Attorneys may also be able to review prenuptial or postnuptial agreements to determine the role that they play in the divorce process.