Can I withdraw funds from my IRA penalty-free as part of a divorce settlement?

One of the most frequent misunderstandings of Texas Family Law I hear is that during a divorce, you can withdraw funds from your 401(k) or IRA without the penalty that would normally apply to a withdrawal before age 59½. Don’t be led into that trap.

It is true that under normal circumstances, you will be hit with a 10 percent penalty if you withdraw funds from your account before you reach the age of 59½.

It is also true that the penalty does not apply if you exchange the funds between spouses in a divorce. That does not mean that you avoid the penalty if you actually remove the funds.

If you properly “roll over” the funds from a tax-advantaged account into another tax-advantaged account, then there is no penalty (or tax) due. The operative word is “properly.” If it is not done correctly, then the penalty will apply.

Your financial institution should be helpful in ensuring you do it correctly. The transfer has to be from account to account. If you remove the money, even for just a few seconds, you will pay the penalty. So, you can’t withdraw the funds, put them in your checking account, and then immediately transfer them into your IRA.

Of course, if you need the funds and withdraw them to use, both the penalty and the tax will be assessed. Make sure that you don’t accidentally pay a penalty (and tax) unnecessarily. Check with your attorney or financial advisor before doing anything.

Having the proper paperwork could mean the difference between a tax-free transfer and a taxable one.

The caring Bob Leonard Law Group PLLC team and board certified family law attorney can tackle your complicated divorce case in Tarrant and Parker county.