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Are IRA distributions due to divorce subject to income tax or IRS penalty if the IRA owner is under 59½?

Generally, yes. Unless an exception applies, distributions from a traditional IRA taken before age 59½ are subject to the 10% early distribution penalty – even if made to satisfy a divorce court order. The penalty applies to the taxable portion of the withdrawal and is in addition to regular income tax, as IRAs do not have a QDRO‑type exception like qualified retirement plans.

The only divorce-related exception for IRAs is if the amount is transferred to the former spouses’ IRA pursuant to the terms of a divorce decree or legal separation instrument (IRC section 408(d)(6)). However, the transfer must be done by:

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

Before proceeding with a distribution or transfer to a former spouse, financial organizations should request and review a copy of the divorce decree or legal separation paperwork for specific instructions on how to handle the distribution from the IRA. If the decree is silent on how the funds are to be distributed (payment via check to former spouse, trustee-to-trustee transfer to former spouse’s own IRA, etc.) or the amount that should be distributed (stated dollar amount, percentage of the IRA as of a specified date, etc.) it is recommended that the divorce decree or legal separation paperwork be amended to provide specific instructions.

Once it is clear how to handle the withdrawal (or transfer, if applicable) proceed as instructed within the decree or legal separation paperwork.