Dividing most retirement accounts in a divorce can be a major headache, but Roth IRAs are an exception. Unlike defined benefit plans, Roth IRAs don’t pay out in monthly increments from your employer when you retire, so calculating a monthly payout to your spouse is not required. You contribute to a Roth IRA on your own each year with marital income, up to a certain limit set by the Internal Revenue Service. If you divorce, that part of your Roth IRA that was financed with marital income is apportioned between you and your spouse.
Calculating the Division
If you established your Roth IRA and began contributing to it prior to your wedding, the balance as of the date of your marriage remains your separate property. The divisible portion is that which accrued from the date of your marriage until your date of separation. In some states, the cutoff date is the day of your divorce. Although all states allow you to divorce by marital settlement agreement so you can set your own terms regarding how you'll divide your IRA, a judge will probably divide the marital portion roughly in half if he has to make the decision for you. In community property states, he’s obligated to divide this portion of the balance 50/50. In all other states, he will do it in a way that seems fair, but this usually doesn’t stray extremely far from an equal split.
Documenting the Division
Your or your attorney will substantiate the marital portion of your Roth IRA with a statement as of the beginning date of your marriage and a statement as of the ending date of your marriage. After you’ve calculated that marital portion, you or a judge must decide how much of that balance each of you is going to receive. For tax purposes, you must specifically incorporate this into your marital settlement agreement or decree, stating that you’re transferring a portion of this amount to your spouse pursuant to the terms of your divorce.
Making the Transfer
The actual transfer of your spouse’s portion is a simple matter of providing your financial institution with a copy of your decree. The institution will transfer the appropriate amount into a similar retirement account in your spouse’s name. The money will move directly from your institution to one your spouse has chosen; it never touches your hands. When you divide your Roth IRA in this manner, the transaction won't incur any taxation or IRS penalties if your decree corroborates the reason you’re doing it. If your spouse is receiving the entire account, your institution can change the name on the account from yours to hers.
If you make the transfer too soon, before your divorce is legally final, the transaction loses its immunity tax-wise. You might also incur a penalty for early distribution. If your spouse decides to cash out her portion after the date of your divorce and after your financial institution has made the transfer to her, she’s subject to IRS penalties and taxation, not you.