Employee Benefits-IRS Provides Guidance On Application Of 10% Penalty For Early IRA Withdrawals

In Employee Plans News, March 20, 2012, the Internal Revenue Service (“IRS”) faced the following question: Will I have to pay the 10% additional tax on early distributions if I am 47 years old and ordered by a divorce court to take money out of my traditional IRA to pay my former spouse? The IRS answered the question as follows.

Yes. Unless you qualify for an exception, you must still pay the 10% additional tax for taking an early distribution from your traditional IRA even if you take it to satisfy a divorce court order (see Internal Revenue Code section 72(t)). The 10% additional tax is charged on the early distribution amount you must include in your income and is in addition to any regular income tax from including this amount in income.

Unlike distributions made to a former spouse from a qualified retirement plan under a Qualified Domestic Relations Order, there is no “divorce” exception to the 10% additional tax on early distributions from IRAs. The only divorce-related exception for IRAs is if you:
• transfer your interest in the IRA to a spouse or former spouse, and • the transfer is under a divorce or separation instrument (see IRC section 408(d)(6)).

However, the transfer must be done by:
• changing the name on the IRA from your name to that of your former spouse (if transferring your entire interest in that IRA), or • a trustee-to-trustee transfer from your IRA to one established by your former spouse. Note: an indirect rollover doesn’t qualify as a transfer to your former spouse even if the distributed amount is deposited into your former spouse’s IRA within 60-days.