IRA Transfers and Divorce: What You Need to Know

An IRA transfer in divorce can be tax-free if treated as a “transfer incident to divorce” and ordered in the divorce decree or separation agreement. Handle it incorrectly, and you could face income tax and penalties. Incident to divorce means the transfer occurs within a year after the date your marriage ends.

Why Retirement Accounts Are Complicated in Divorce

Retirement accounts often cause the most confusion in divorce. For many couples, IRAs, 401(k)s, and pensions make up a large share of marital wealth.

Here’s where things get tricky:

• Qualified plan assets (like 401(k)s or 403(b)s) require a Qualified Domestic Relations Order (QDRO) to divide.
• IRA assets, however, don’t use QDROs. Instead, they’re divided through a transfer incident to divorce IRA.

This difference matters because while both can be divided tax-free if handled properly, the rules and paperwork vary. One misstep, and what should have been a tax-free transfer could suddenly become a taxable distribution with penalties attached.

For the full context on how divorce impacts your overall tax situation, check out our Divorce or Separation Taxes Page.

IRA Divorce Transfer Rules (IRS Requirements)

So, what exactly is an IRA divorce transfer?

The IRS allows spouses (or ex-spouses) to transfer IRA assets without taxes or penalties if the move is “incident to divorce.” This means:

• The transfer is carried out under a divorce decree, separation agreement, or written instrument incident to divorce.
• The transfer is direct, moving funds from one spouse’s IRA into the other spouse’s IRA (the “receiving spouse”).

No, you can’t just shake hands and agree. The IRS requires a legal document (such as a divorce decree or property settlement agreement) to make the transfer legitimate.

If you skip that paperwork, the IRS could view it as a taxable distribution, meaning income tax, potential 10% early withdrawal penalties, and interest could apply.

👉 Reference: IRS Publication 590-A explains these rules in detail.

How IRA Transfers Are Taxed in Divorce

Handled correctly, a transfer incident to divorce is completely tax-free. Neither the transferring spouse nor the receiving spouse owes income tax on the amount moved.

But the IRS doesn’t hand out tax-free treatment if you cut corners. Common mistakes that can flip the switch to taxable include:

• Taking a distribution instead of a direct transfer. If the funds are paid to the former spouse and deposited into another IRA, the IRS may treat it as a withdrawal.
• Missing documentation. If the divorce settlement doesn’t clearly state the transfer, the IRS could challenge its tax-free status.
• Custodian errors. If the IRA custodian processes a transfer incorrectly, such as issuing a check payable to you instead of directly to the receiving IRA, the IRS may treat the transaction as a taxable distribution.
  If you receive Form 1099-R, it often means the financial institution reported the movement of funds as a distribution rather than a direct trustee-to-trustee transfer. This does not always make it taxable, but it does trigger IRS matching and may require documentation or correction.

For a broader breakdown of how retirement funds are handled, see our Retirement Accounts & Divorce guide.

Step-by-Step: How to Transfer an IRA in Divorce

Here’s a straightforward process to help divorcing couples (and their advisors) avoid IRS headaches:

1. Secure the Divorce Decree or Settlement Agreement
2. • Make sure the decree spells out the IRA transfer details: the amount or percentage and the account number.
   • Vague language like “divide retirement accounts fairly” won’t cut it.
3. Work with the IRA Custodian
4. • Provide them with a copy of the court order or settlement.
   • Complete any required transfer forms.
5. Confirm a Direct Transfer
6. • The money must be transferred directly from one IRA to the other.
   • The spouse should never take possession of the funds.
7. Keep Records
8. • Retain copies of the divorce decree, custodian paperwork, and transfer confirmations.
   • If the IRS questions the transaction later, you’ll have proof.

This process helps keep the transfer smooth, tax-free, and aligned with IRS requirements.

Beneficiary Updates and Documentation After Divorce

After the transfer, don’t forget to update beneficiary designations. Divorce may end the relationship, but it doesn’t automatically remove your ex-spouse from your IRA paperwork. If you skip this step, your former spouse could still inherit the account—even if your will says otherwise.

Always review and update designations to reflect your new financial situation. This is especially important if you have children, remarried, or named other dependents.

Equally important: keep all transfer paperwork and confirmations. Hold onto the divorce decree, custodian forms, and transfer records. If the IRS audits your return, you’ll need proof that the transaction was “incident to divorce” and not a taxable withdrawal.

IRA Divorce Transfer Mistakes That Trigger Taxes

Unfortunately, mistakes with IRA divorce transfers are common—and costly. Let’s break down the biggest pitfalls:

• Using a withdrawal instead of a transfer. Cashing out the IRA and handing your ex a check? That’s a taxable distribution.
• Failing to involve the IRA custodian. The custodian must process the transfer; you can’t DIY this with Venmo.
• Unclear settlement language. Ambiguity invites IRS scrutiny. Always spell out “IRA transfer” in the divorce settlement.
• Forgetting to update beneficiaries. Forgetting to update paperwork could mean your ex inherits your IRA years later—despite your intentions.

Pro tip: If you’re dividing multiple accounts (say, Roth IRA, Traditional IRA, and a 401(k)), make sure each account type is listed separately in the divorce agreement.

We cover more examples of tax blunders in our Divorce Tax Mistakes to Avoid guide.

IRA Transfers vs. Qualified Retirement Plan Assets

One of the biggest misconceptions in divorce is that all retirement accounts follow the same rules. They don’t.

Qualified retirement plans (401(k)s, pensions, 403(b)s) require a Qualified Domestic Relations Order (QDRO), approved by the plan administrator, to divide assets. Without a QDRO, the transfer may not be recognized.

IRAs, on the other hand, don’t use QDROs. They require clear divorce decree language and a custodian-to-custodian transfer.

Sometimes, a spouse may roll over QDRO-distributed assets into an IRA for easier management. That’s perfectly fine, but the initial division must follow QDRO rules.

👉 Here’s a side-by-side look at the key differences:

IRA Transfers vs. QDRO Plans

Final Thoughts + Checklist

An IRA divorce transfer can be a tax-free way to divide assets—if you follow IRS rules, use the right legal documents, and involve the IRA custodian. Slip up, and you risk unexpected tax bills and penalties.

👉 To make it easy, we’ve put together a free IRA Transfer Checklist that walks you through the process step by step. Download it now to protect your retirement assets during divorce.