When people in Pittsburgh get a divorce, they will need to divide their property. In some cases, this can be complex. For example, people who have an IRA may have already begun taking distributions from it despite not being 59 1/2 years old. If this is for certain approved reasons, the person will not have to pay a 10% penalty. However, it is unclear whether dividing the account in a divorce is considered a modification.
The reason it is important to determine this is because if a person is getting a 72(t) distribution and there is a modification to the IRA, the person will then have to pay a retroactive penalty on all distributions. While there is no clear guidance from the IRS in this particular circumstance, its regulations do state that if a nontaxable portion of the account is transferred, this is considered a modification. This is what happens if an individual gives part of the IRA to a spouse in a divorce.
However, when individual taxpayers have sought what are known as private letter rulings, or PLRs, the IRS has determined that this is not considered a modification. Any individual PLR is not supposed to be taken as a general rule, but seeking one is expensive. Therefore, people in this situation might want to speak to legal and financial advisers.
There can be other financial complexities while dividing property during a divorce. For example, the couple may decide that they want to sell their home and split the proceeds. However, the house may need some repairs or renovation before it can go on the market, and it is necessary to decide how to pay for this. The couple may also need to decide what they will do and who will pay for upkeep while waiting on the house to sell.