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How 72(t) distributions may complicate IRA division

Oregon couples who are going through a divorce may need to split a retirement account as part of their agreement about property division. An IRA can be divided with a separation agreement or a divorce decree, but this can be more complex if the IRA owner has begun taking 72(t) distributions before the age of 59 1/2.

While IRA distributions prior to reaching this age are usually subject to a 10% penalty, there are circumstances in which they are allowed. However, IRS regulations also say that if there are modifications to the account, the person will be required to pay the 10% penalty on the distributions taken. While it does not specifically say that dividing an account in case of divorce would be considered a modification, under IRS regulations, it appears to qualify as one.

Some people have sought additional guidance from the IRS using what is called a private letter ruling. PLRs are published for the public to see, but they are only supposed to apply to the individual situation. However, the consistency of the IRS in its response to PLRs seems to indicate that division in a divorce does not constitute a modification. Since PLRs can cost more than $10,000 and take more than a year, most people do not seek them but may want advice from a financial professional.

There are other complex issues around property division that may arise in case of divorce. For example, the couple may decide that they want to sell the family home and split the proceeds. This can seem straightforward, but the house may need some work done on it before it can be sold, so the couple will need to decide who will pay for this. They may also need to determine who will pay expenses if the home does not sell immediately.

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