Colorado residents might be surprised to learn that gray divorces are on the rise. In these cases, “gray” refers to couples who are over the age of 50. This type of divorce has created some complex and uncommon issues.
One major example is splitting an IRA. Normally, this is a straightforward process. However, the situation can become complicated when a person’s account has outgoing 72(t) distributions. For example, if an individual has decided to retire early or they have a cash flow problem, they may tap into their IRA before reaching 59 and 1/2 years old. This will trigger annual payments that are referred to as 72(t) distributions. This situation may be complicated on its own, but it becomes even more complicated if a person gets a divorce and the IRA is split.
The interesting thing is that the IRS has not provided formal guidance on how this matter should be handled. Informal guidance available through private letter rulings that have been made public are in conflict with some of the guidance provided by the IRS on 72(t) distributions.
Accounts like an IRA and 401(k) have all been designed to help a person support themselves during their retirement. To prevent the creator from tapping into these resources early and not be left with anything for retirement, Congress has attached strings to the money in these accounts. With an IRA, the account holder will have to pay normal income tax and a 10% penalty when tapping into this money early. However, some exceptions exist.
A soon-to-be ex may want to speak with a family law attorney before starting the divorce process. Legal counsel could provide answers to questions about property division and asset division. The attorney may also be able to offer practical help.