While a QDRO is not required to split up assets in an IRA (traditional or Roth), you still need to make sure the split is done properly so no tax or penalties are incurred.
The divorce decree itself must specify the division, including the amount and when it is to occur. The custodian of the IRA — i.e., a bank, brokerage or other financial services company — will need a copy of the agreement and require paperwork to be filled out. There also should be a rollover IRA account ready to receive the funds.
“Generally speaking, it’s a straightforward thing to do,” Vasileff said.
However, she said, just because a QDRO isn’t needed, it doesn’t mean that IRA owners can take matters into their own hands. If funds in a traditional IRA are withdrawn and then given to the ex-spouse — i.e., it is not a trustee-to-trustee transfer — it is considered a taxable event for the IRA’s original owner.
Not only would that person potentially owe regular income taxes on the money, a 10 percent early withdrawal penalty could be due if they’re under age 59½ (the age when you can begin withdrawing from a traditional IRA without incurring that penalty, with few exceptions).
While Roth IRA withdrawals are treated differently because the contributions have already been taxed, it’s still important to do a trustee-to-trustee transfer. The Roth owner could face taxation or penalties upon withdrawal depending on their age and how long they’ve owned the Roth IRA.