Dividing a traditional IRA with your ex-spouse the wrong way can be costly, as a 35-year-old man found out in this case. After the couple filed for divorce but before the marriage was dissolved, he depleted his IRA and gave her half the funds.He reported the payout as taxable income on his 1040 and paid income tax on it.
He owes the 10% penalty tax on early distributions made before age 59½.
To avoid the fine, payment to the ex must be made pursuant to a QDRO… qualified domestic relations order. Here, the withdrawal was paid directly to him and not under a court order or other judicial decree (Summers, TC Memo. 2017-125).
Take care if you’re planning to use funds from an IRA to pay medical costs.
The exception to the 10% penalty is narrow, a 50-year-old taxpayer learned when she tapped her retirement plan to pay her and her husband’s living expenses and medical costs after a job loss. To qualify as penalty-free, the funds must be used for medical costs of the taxpayer, spouse or dependent. Additionally, the distribution must cover medicals paid in the year of the withdrawal. And only medical expenses that exceed 10% of a taxpayer’s adjusted gross income qualify for the exception.
Here, unreimbursed medicals didn’t meet the AGI threshold percentage, so she owes the 10% tax on early retirement payouts (Fann, TC Summ. Op. 2017-43).
A taxpayer who used IRA funds to buy stock for the account gets good news. The owner of an IRA wanted to purchase stock in a firm that wasn’t publicly traded, but the custodian balked. So he took matters into his own hands, having the custodian wire funds from the IRA directly to the corporation. The company then issued shares in the IRA’s name. The custodian received the stock certificate more than 60 days later and characterized the wire transfer as a taxable distribution on Form 1099-R.
The IRA owner didn’t make a taxable withdrawal, an appeals court says, disagreeing with the Service’s claim that he constructively received IRA proceeds. He isn’t taxed…he never got any cash, stock or other assets (McGaugh, 7th Cir.).