Academic journal article Journal of Accountancy

The Ins and Outs of IRAs as Community Property

Academic journal article Journal of Accountancy

The Ins and Outs of IRAs as Community Property

Article excerpt

In a letter ruling late last year, the IRS said that one spouse could have a community property interest in the other's IRA and that the reclassification of an IRA as marital property was not a taxable distribution. The IRS also said, however, that if a spouse transferred his or her interest in the marital property IRA to a separate IRA, the distribution would be taxable.

In LR no. 199937055, a husband had two IRAs as the result of a rollover from a qualified plan. His wife had an unfunded spousal IRA. As part of an estate plan, the couple executed a marital property agreement. Under the agreement, the couple classified the husband's IRAs as marital property. They proposed to divide his IRAs into two equal shares, and transfer the wife's interest into her separate IRA.

The IRS said the wife had a community property interest in her husband's IRA under IRC section 408(g). Even though the section contained no specific language regarding such interests, it did not negate any substantive rights under state law, according to the IRS. The service used the general rule that federal statutes do not preempt state laws unless such preemptions are the clear intent of Congress.

The IRS then stated that the reclassification of the husband's separate IRAs as marital property was not a taxable distribution under section 408(d)(1), because there had been

* No distribution or transfer of assets from the IRAs. …

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