Individual Retirement Accounts (“IRAs”), and “Keogh” plans are private retirement plans that do not fit in with other retirement plans, despite its similarities to a typical 401(k). Keoghs are essentially like other private retirement plans, but for sole proprietors, partnerships, or “S” corporations.

A “qualified domestic relations order”, or QDRO is not required to divide an IRA in a divorce action. All that is required is a simple order within the decree, or other order. However, there are a variety of special tax rules that affect how an IRA is distributed. These involve taxes and penalties for early withdrawal and the tax implications specifically relate to the kind of IRA involved. The two most prominent are “Traditional” IRAs and “Roth” IRAs.

Traditional IRAs

Traditional IRAs are individual retirement accounts usually held by a bank or brokerage company that directs the investment of the deposited funds into specific stocks, bonds, or mutual funds (just to name a few). One of the primary attractions of the traditional IRA is that a specific portion (based on one’s tax bracket) of contributions made are tax- deductible. However, its primary drawback is that when it comes time to withdraw the funds, the individual is subject to federal income tax and possibly state and local taxes as well.

Although a QDRO is not necessary to divide a traditional IRA upon divorce, we suggest getting appropriate tax advice before any distribution is made from an IRA as the tax consequences may be significant.

Roth IRAs

Like Traditional IRAs, Roth IRAs are individual retirement accounts usually held by a bank or brokerage company that directs the investment of deposited funds into specific stocks, bonds, or mutual funds (just to name a few). However, Roth IRAs significantly deviate from Traditional IRAs because the money actually withdrawn is tax free. In other words, the individual foregoes a tax break when making contributions (Traditional IRA) for a tax-break upon withdrawal during retirement and some plans allow for withdrawal, tax free at any time.

Although a QDRO is not necessary to divide a Roth IRA upon divorce, we suggest getting appropriate tax advice before any distribution is made from an IRA as the tax consequences may be significant.

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