Have you, your spouse, or a dependent received a COVID-19 diagnosis?
Are you struggling to cover costs because of a coronavirus-related furlough, lay off, reduction in work hours, or an inability to work for want of child care or forced business closure?
Are you in the midst of a legal separation, divorce, or dissolution of a domestic partnership?
If you are, my heart is with you, and my mind is seeking innovative ways to help you access funds necessary to ride out this storm. Thankfully, so too are our politicians, and on March 27, 2020, the Coronavirus, Aid, Relief and Economic Security (CARES) Act became law.
The CARES Act permits an individual under age fifty-nine and a half to withdraw up to $100,000 from an IRA or other defined employer plans like a 401(k), 403(b), or 457(b) without incurring a ten percent early withdrawal penalty (retroactive to January 1, 2020.) A person must receive the distribution in 2020, and pay personal income taxes on the funds, but can spread the tax payments evenly, or replenish the account, over three years. (A person may borrow instead of permanently withdraw the funds.)
Being able to access $100,000 and not pay a $10,000 penalty and lump-sum $20,000+/- tax bill from the distribution may be a godsend to most. But the net might not go far enough for those with high burn rates fueled by multi-million dollar mortgaged homes, car loans, kids, private school tuitions, stalled careers, and shuttered businesses, or separated couples with single (and historic) primary breadwinners and homemakers with two established homes.
Being able to access $200,000, however, may give families in San Francisco, San Mateo, Santa Clara, Los Angeles, and beyond the cash cushion they need to stay afloat.
But how can you withdraw $200,000 penalty-free from one spouse or partner’s IRA or retirement plan under the CARES Act?
In short, unless the federal or state government provides otherwise, if you and your spouse or partner agree, one spouse or partner can withdraw $100,000 from the retirement account or plan and rollover another $100,000 into the second spouse or partner’s IRA, and then he/she/they can withdraw $100,000 from his/her/their retirement account.
What if you don’t have a global agreement yet or are uncertain about how you’ll characterize the distribution (e.g., division of assets, an advance of support, reimbursement, or a loan?)
In California, you can make and execute many legally binding agreements or judgments during the course of a single separation or dissolution process. But you must expressly state within the agreement and Judgment that it is not comprehensive, it’s without prejudice, and that you reserve your rights and the court’s ability (jurisdiction) to resolve all related and other outstanding issues in the future.
How do you transfer retirement funds from one spouse or partner to the other tax-free during divorce or separation?
In essence, you must follow the federal regulations and have the plan administrator or financial institution rollover the funds or assets (i.e., stock) from the first account into the second account. The party may not withdraw and transfer the funds; the bank, brokerage, or retirement plan must handle the transfer.
A failure to comply with requirements will lead to penalties and taxation of the second $100,000 withdrawal. So proceed with caution. And, please speak to professionals like a Certified Financial Planner, tax lawyer, and family lawyer to understand all options available under the CARES Act before you decide to withdraw funds from your retirement accounts.
Here is an abbreviated “how to” roll over retirement funds during a Legal Separation or Dissolution of Marriage or Domestic Partnership in California:
- File and serve a Petition for Legal Separation or Dissolution of Marriage or a Domestic Partnership, and Joinder of the retirement plan (if required)
- Prepare and exchange Preliminary Declarations of Disclosures
- Draft a Stipulated Judgment that states the parties agree to roll over $100,000 from one partner or spouse’s retirement assets to the other
- Prepare and execute California Judicial Council forms necessary to process the Judgment
- Open or identify the recipient spouse or partner’s IRA
- Prepare and submit a Domestic Relations Order to the retirement plan administrators for approval, revise if necessary, and execute
- Submit Judgment, Agreement, and DRO to the court or a private judge for review, signature, and filing
- Complete the financial institutions’ requisite retirement transfer forms, and submit it or the DRO and the Judgment for execution