Dividing Retirement Accounts in Divorce: the facts

1. A transfer of property between spouses incident to a divorce is not a taxable event, and the recipient takes the transferor's basis (§ 1041): the tax travels with the asset, so a dollar in a pre-tax account is not a dollar.
2. An IRA is divided by a transfer under the divorce instrument; the recipient's share becomes the recipient's own IRA, taxed and penalized under the ordinary rules from then on (§ 408(d)(6)).
3. A 401(k) or pension is divided by a qualified domestic relations order, a court order the plan must honor (§ 414(p)). A distribution to the former spouse under that order is exempt from the 10 percent early-withdrawal tax (§ 72(t)(2)(C)); the same money moved to an IRA first loses that exemption.
4. Example: a $1,000,000 pre-tax account split in half between a spouse in the 35 percent bracket and one in the 12 percent bracket is worth $325,000 to the first and $440,000 to the second after tax, 42% and 58% of the after-tax total.
5. A Roth account is worth its face value to either spouse; a brokerage account is worth its value less the tax on its built-in gain, which the recipient inherits with the basis.
6. The settlement sheet lists statement balances. The after-tax sheet, at each spouse's own rates, is the one that describes what each will have to live on.

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