August, 2018
Divorce
Take Distribution from Pension Plan
or IRA?
IRA Custodian’s Question
We had a customer come to one of our branches. In
her divorce her husband has to pay her half of his retirement
plan he has elsewhere. Our customer has no
intensions of leaving the funds in a IRA as she says she
need the funds.
Are we required to open an IRA for her to accept the
funds and then just turn around and charge her our fees
to close immediately?
CWF’s Guidance
There is no law requiring a bank to set up an IRA for
someone if it knows the IRA will be closed immediately.
In order for the bank to charge a fee you would have to
provide the IRA disclosure statement more than 7 days
prior to when she opens the new IRA. Under the 7 day
revocation rule, the bank is not allowed to assess any
type of fee when the IRA plan agreement and disclosure
statement are furnished simultaneously and the IRA
owner exercise their revocation right.
She will want to consider the following. I am assuming
the retirement plan document provides she is eligible
for an immediate distribution. The plan administrator will inform her whether she is eligible for an immediate
distribution.
How old is she? Over 59½ or under?
The retirement plan must furnish her a distribution
form/booklet. She must be given the following three
options. She has the right to take a cash distribution, do
a direct rollover to an IRA or a combination of the two.
If she wants to be paid cash, the plan must withhold
20% of the distribution because she is eligible to directly
rollover her funds into an IRA.
Whether she takes a distribution from the retirement
plan or the IRA she must include the withdrawn amount
in income and she will pay tax at a marginal tax rate
which applies to her. The 20% which is withheld is only
an estimate of her tax liability.
In my opinion if she is under age 59½ she wants to
be paid cash from the retirement plan because the 10%
tax does not apply when funds are withdrawn from a
pension plan on account of divorce. This is not the rule
if she takes a distribution form her IRA. She will also
owe the 10% additional tax. Divorce is not an exception
to the 10% tax for an IRA distribution.
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