IRA Rollover Trap (in Divorce Cases)
In divorce cases, it is normal to split IRA accounts between spouses. Normally, this is done by one spouse rolling over a portion, oftentimes half, of his/her IRA account into another qualified IRA account in the name of the other spouse. This is a non-taxable event. However, a recent tax court case and a change in the procedures by the Internal Revenue Service have set limitations on the number of IRA rollovers permitted.
If more than one IRA is rolled over in a 12-month time period, that could create a taxable event. In other words, if a spouse rolls over an account in August of 2014, and then in July of 2015 pursuant to a divorce rolls over another IRA account, the second rollover could be treated as a taxable event subjecting that spouse to ordinary income taxes. The lesson is to be careful in doing IRA rollovers and time the rollovers to occur at least one year apart.