Tax implications of Canadian splitting an IRA due to divorce

bmutas · Post by **bmutas** » Fri May 08, 2009 9:14 am

As a Canadian formerly working in the US I have a 401(K) plan with my previous employer. I am now living in Canada (NS). A Nova Scotia divorce decree a few years ago stipulated the plan was to be split with my ex-wife. This requires a Qualified Domestic Relations Order (QDRO) and to make a long story short, due to the near-bankruptcy of my former employer and cross-border jurisdictional issues this activity is not going so well!

It appears as if splitting an IRA account is much easier than splitting a 401(K) so I am currently looking at opening an IRA with Blackmont Capital (Toronto) who seem to be the only financial firm that can open an IRA for Canadians. Rolling the 401(K) into the IRA looks to be straightforward.

My research indicates that I can have the IRA split if I have my divorce decree amended with the following wording:

"Any division of property accomplished or facilitated by any transfer of IRA or SEP account funds from one spouse or ex-spouse to the other is deemed to be made pursuant to this divorce settlement and is intended to be tax-free under Section 408(d)(6) of the Internal Revenue Code."

My question is - if I have my (Nova Scotia) divorce settlement amended as above, will the IRS recognize a foreign divorce order? If not, I imagine I will be subject to income tax on the portion transferred to my ex-spouse as well as the 10% penalty for early withdrawal (less than age 59 1/2). I have asked this question to the IRS but their response was "this is too complicated for us to answer".

Any help appreciated! Thanks.

nelsona · Post by **nelsona** » Fri May 08, 2009 2:04 pm

http://www.investopedia.com/articles/re ... 060403.asp

I'll leave it at that.

bmutas · Post by **bmutas** » Mon May 11, 2009 6:04 am

Thanks for the reference. There is some good information in there.

Unfortunately it does not answer the question as to whether the IRS will recognize a Canadian divorce decree.

nelsona · Post by **nelsona** » Mon May 11, 2009 7:21 am

I think if you carefully look at the response, it is the TRUSTEE is given that responsibility, not IRS.

happynewcargirl · Post by **happynewcargirl** » Fri Aug 07, 2009 1:45 pm

Bmutas, who is it at Blackmont Capital that helped you set the IRA up? The vancouver branch has no idea about this.

I am in a similar situation, in that I have a 401(k) with a former employer, and that employer no longer exists so they want me to move my money out, but I now live in Canada and nobody will open an IRA for me! It's not a large sum of money but I don't want to pay a penalty or ANY us taxes.

Please help! Thanks

ExpatAmerican · Post by **ExpatAmerican** » Tue Aug 11, 2009 11:17 am

Darrell Thompson at Blackmont in Toronto can open IRA's for former or current US residents. He can be reached toll-free at 866-775-7704.