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Lucy, Esq.
Lucy, Esq., Attorney
Category: Legal
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Experience:  Lawyer
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I am 44 years old. Please read this excerpt from my Divorce

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I am 44 years old. Please read this excerpt from my Divorce decree…

“Regarding division of retirement accounts, specifically Husband’s retention of his IRA, the parties specifically state Husband will be liquidating said account in it’s entirety by December 31, 2012, and upon the liquidation of same, Husband shall be solely responsible for any tax consequences or penalties due to the liquidation or withdrawal of said funds and shall hold Wife harmless thereon; and said tax consequences were taken into consideration by the parties when they entered into the property settlement set forth herein.”

I am told this is an odd thing to include in a divorce decree. I think this was a ploy to make me pay taxes and penalties to break me financially. I will be asked about it and I am late in doing it. I want to meet my obligation and avoid both taxes & penalties by doing one of the following…

Option 1: I could “liquidate” my IRA by rolling it over to another IRA with another broker. Specifically, I would sell all stocks & funds in the IRA, converting them to cash. That cash would be deposited into a different IRA account with a different broker. Does this meet my obligation? Does this action meet the definition of liquidating?

Option 2: I could elect to receive an early cash distribution subject to tax and penalties. The brokerage would file a 1099R coded as early withdrawal. But I would take the cash and deposit it into a qualified IRA plan within 60 days. My accountant says he would recode the distribution as a rollover at tax time. Therefore no penalties or taxes are owed. Does this method more clearly meet my obligation? I would rather not have to do this.

Which option is better and why?

My name is XXXXX XXXXX I'd be happy to answer your questions today.

Are you supposed to be transferring some portion of the assets to your wife? Why does the judge want you to liquidate the entire account?
Customer: replied 3 years ago.

The divorce is final. This was a mediated divorce and both parties agreed
with the terms. All asset transfers are complete. No part of the IRA need
be transferred. The judge did not refer to this issue specifically. He
spent about 3 minutes with us and asked us if we understood and agreed to
the terms. The just answer website will not give me access to reply to you
there. Thanks for digging into my question.

Customer: replied 3 years ago.

If I need to adjust child support, she will say I should have plenty of liquid money to pay her.

That clause really doesn't even make any sense. I don't understand why it would be in the divorce decree if you're not giving any of the money to your ex (in which case, there are ways to avoid the taxes and penalties). I wonder if a judge would even enforce a provision that goes against all of the public policy reasons that we have IRA accounts in the first place, that causes you to pay money to the IRS literally for no reason, and that does not in any way, shape, or form, benefit your ex-wife.

Technically, to "liquidate" means to turn into cash. That would mean option 2. If your ex is likely to ask for proof that you liquidated the account, that's going to require a statement showing a zero balance and that the account is closed. If she's also going to ask that you produce a cash check, or a statement showing some other bank account, you won't have that unless you do the 60 day rollover instead of the direct transfer. This is actually a really common transaction. I've done both, and I understand why the direct transfer is preferable, but as long as you can show the rollover contribution within 60 days, the rollover will allow you to show that you took the cash and closed the account - what you do with the money after that is your own business, and that means you can put it in another retirement account if the divorce decree doesn't say that you can't.

If you have any questions or concerns about what I've written, please reply so that I may address them. It's important to me that you are 100% satisfied with the service I provide. Otherwise, please rate my service positively so that I get credit for answering your question. Thank you.
Customer: replied 3 years ago.

So if I understand correctly...

A direct transfer would provide a statement showing zero balance and a closed account for proof. But a 60 day rollover would provide the same proof plus a cash check. And the 60 day rollover technically meets the definition of liquidation, but the direct transfer does not. As long as the cash distribution is rolled to a new plan in 60 days, there shouldn't be tax or penalties. Do I understand your points correctly? Thank you.

I apologize for the delay. I was experiencing technical issues.

Your understanding is correct, yes.
Lucy, Esq., Attorney
Category: Legal
Satisfied Customers: 26981
Experience: Lawyer
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