How to Avoid IRA Early Withdrawal Penalties in a Divorce

By Beverly Bird

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Because IRAs are tax-deferred accounts until you retire and tap into them, it makes sense that if you take the money early, the IRS will assess a 10 percent penalty. However, some circumstances, such as divorce, can force you to access the money well before you planned to and before age 59½, when you could normally take it without paying the 10 percent penalty. Fortunately, the IRS understands this and makes allowances for it.

State specifically in your divorce decree or settlement agreement that the division or transfer of your IRA is part of the property settlement between you and your spouse. Include language that you’re passing it from “trustee to trustee.” Name the financial institution, the account number and the value as of the date of your divorce. If you’re not transferring the entire account, state the amount your spouse is to receive.

Consult with your spouse to find out if she wants the money rolled over into an IRA account she already owns or if she is going to open one to receive the money. As long as the money moves from your retirement account directly into one in her name, there are no penalties to either of you. Get the identifying information for the account she chooses.

Instruct your financial institution to roll over the funds into the account your spouse has specified. If your spouse doesn’t have an existing IRA account or doesn’t establish one, you can instruct your financial institution to make the payment to her directly. You won't incur a penalty.


If your spouse takes the money in cash, rather than rolling it directly into an IRA plan of her own, she has 60 days to deposit the amount into a retirement account. After that, she must pay taxes on it as ordinary income. If she hasn’t yet reached age 59½, she, not you, will be subject to the 10 percent penalty unless she receives a special exemption from the IRS. For example, if she is disabled, she’s not subject to the penalty. She won't have to pay it if she uses the funds toward tuition for herself or a dependent, or if she uses up to $10,000 of it as a down payment to buy a home. She will still have to pay income tax on it, however.