Is Your IRA Community Property? State Rules, Divorce, and Death

An IRA is community property to the extent it was funded with wages or other earnings during the marriage while the couple lived in a community property state, regardless of whose name appears on the account. Money contributed before the marriage, or funded by a gift or inheritance received during the marriage, stays separate. One large caveat sits on top of all of this: federal tax law treats IRA distributions as the account holder’s own income, so the state-law ownership split and the federal tax bill don’t line up.

Does Your State Even Use Community Property

Nine states apply community property as the default rule: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska lets couples opt in through a written agreement signed by both spouses, but it is not automatic.¹ Every other state uses the common law (equitable distribution) system, and the analysis below won’t directly govern an IRA owned by a couple domiciled there.

Inside a community property state, the name on the IRA statement doesn’t settle ownership. What matters is where the money came from.

Which Dollars Are Community and Which Are Separate

Contributions made from either spouse’s paycheck during the marriage are community property. That is true even when one spouse earned nothing and the IRA sits entirely in the other spouse’s name. If the account existed before the wedding, those pre-marital contributions stay separate, but every dollar added from marital earnings afterward builds a community interest alongside them.² Contributions funded by one spouse’s inheritance or a gift received during the marriage also remain separate.

Most IRAs end up mixed. Years of contributions, some before marriage and some during, sit in the same account and get invested together. Sorting out who owns what is called tracing, and it usually requires reconstructing the source of each deposit. If you’re claiming a separate interest in a commingled IRA, you carry the burden of proving it. Fail to trace adequately and the entire balance can be presumed community property.

Growth and Income on Separate Contributions

Passive market appreciation on separate contributions generally stays separate. A $50,000 pre-marital balance that grew to $80,000 through market gains keeps the $30,000 of appreciation on the separate side of the ledger. Income earned on separate assets during the marriage is treated differently in some community property states, where cash dividends reinvested in the account can be considered community income even though the underlying investment is separate. The line between passive growth and income varies by state and is one of the harder questions in this area.

SEP and SIMPLE IRAs

The IRS applies the same community property analysis to every IRA type. SEP IRAs (including employer contributions), SIMPLE IRAs, traditional IRAs, and Roth IRAs are all subject to the same source-of-funds test.³ Because SEP and SIMPLE accounts can hold much larger annual contributions, the tracing exercise tends to carry more money with it.

The Federal Tax Override

Here the state and federal rules diverge. The Internal Revenue Code says the IRA provisions apply “without regard to any community property laws.”⁴ When money comes out of the IRA, the IRS treats the distribution as the separate income of the spouse whose name is on the account, even if the funds inside are community property under state law.³

In practice, the account-holding spouse reports 100% of IRA distributions, pays the income tax, and absorbs any early withdrawal penalty. The other spouse still owns half the community portion as a matter of state property law, but the IRS does not split the tax bill to match. Couples who assume the tax follows the ownership often learn otherwise when one spouse takes a large withdrawal.

Dividing an IRA in a Divorce

Once a court or settlement establishes each spouse’s share, the IRA has to be split. The mechanics are not the same as for a 401(k), which uses a Qualified Domestic Relations Order.⁵ IRAs do not use QDROs.

The tax code allows a non-taxable transfer of IRA funds between spouses or former spouses when it is made under a divorce decree or written separation agreement.⁶ The paperwork needs to specify a dollar amount or percentage. The receiving spouse needs their own IRA to accept the funds, and the money has to move directly from one custodian to the other. Done this way, no one owes tax, the funds keep their tax-deferred status, and the custodian does not issue a Form 1099-R.⁷ A traditional IRA cannot be moved into a Roth IRA this way without triggering a taxable conversion.

Don’t Cash Out to Pay Your Spouse

A common and costly mistake is for the account holder to withdraw cash from the IRA and hand it to the other spouse. That withdrawal is immediately taxable as ordinary income to the account holder. If the account holder is under 59½, the IRS adds a 10% early withdrawal penalty.⁸ Unlike with 401(k) plans, there is no divorce exception to the IRA early withdrawal penalty. The penalty applies even when the court specifically orders the distribution.⁹ Use a direct trustee-to-trustee transfer instead.

What Happens When the IRA Owner Dies

The IRA owner can name anyone as beneficiary, and the custodian will pay that person on death. Federal law does not require spousal consent for IRA beneficiary designations the way it does for 401(k)s and pensions.⁴

State community property law still recognizes the surviving spouse’s ownership interest in half of the community portion. If the deceased spouse named a child, sibling, or anyone else as beneficiary of an IRA funded with marital earnings, the surviving spouse can assert a claim to their community share. Pursuing that claim typically means filing suit against the named beneficiary, proving the account was funded with community earnings, and quantifying the community interest. The process is expensive, slow, and often pits a surviving spouse against stepchildren.

The IRS has indicated that when a surviving spouse recovers their community property share from a deceased spouse’s IRA, they may roll those funds into their own IRA within 60 days of receiving the distribution and preserve the tax-deferred status.

The 401(k)-to-IRA Rollover Trap

Employer plans like 401(k)s come with built-in spousal protection. Before a participant can name anyone other than their spouse as beneficiary, the spouse has to give written, witnessed consent.¹⁰ That protection does not follow the money into an IRA. Federal courts have held that ERISA’s spousal consent rules do not carry over to funds rolled from a 401(k) into an IRA.

Once the money is in an IRA, the account holder can name any beneficiary without telling the spouse. A working spouse could roll a large 401(k) balance into an IRA, name a child from a prior relationship as sole beneficiary, and the other spouse would have no advance notice. The surviving spouse would still hold a community property claim to half the funds, but only after discovering the problem and fighting for it. If your spouse is planning a 401(k) rollover, pay attention to who ends up as beneficiary on the new IRA.

Moving Between States

Property characters do not reset when a couple relocates. Moving from a community property state to a common law state does not retroactively convert community property into separate property. Contributions that were community under the former state’s law keep that character, and the community estate is simply treated as terminated going forward.²

Moving the other direction brings a different wrinkle. Some community property states apply a concept called quasi-community property, under which assets that would have been community if the couple had always lived there are treated as community for purposes of divorce or death. Not every community property state recognizes it, and the rules can differ between personal property and real estate. If you’ve lived in both systems during the marriage, the tracing exercise on your IRA gets harder.

Transmutation and Commingling

Mixing separate and community money in the same IRA can convert the separate portion into community property if you lose the ability to trace which dollars came from where.² Transmutation can also happen by agreement between spouses, sometimes without a formal written document depending on state law. Keeping clear records of every contribution source, from the day the account is opened, is the only reliable protection for a separate property claim.

Setting the Rules in Writing

The cleanest way to avoid later fights over an IRA is to address the character of the account before it is in dispute. Couples in community property states can enter a marital property agreement that classifies some or all IRA funds as separate or community.³ A prenuptial agreement handles this before the wedding; a postnuptial agreement handles it afterward.

A workable agreement identifies each IRA by account number, states whether the current balance is separate or community, and specifies how future contributions will be treated. State formalities vary, but a signed, detailed, written agreement is the version that holds up. On the beneficiary question specifically, the straightforward fix is for the IRA-owning spouse to name their spouse as primary beneficiary, or at a minimum to obtain written consent before naming anyone else. Without one of those steps, the surviving spouse’s community rights usually surface as a legal dispute between the beneficiary and the surviving spouse after death, which is the outcome the written agreement is meant to prevent.

1
Justia Law. Alaska Statutes Title 34 Chapter 77 Section 34.77.090 – Community Property Agreement
2
Internal Revenue Service. IRM 25.18.1 Basic Principles of Community Property Law
3
Internal Revenue Service. Publication 555 (12/2024), Community Property
4
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
5
Internal Revenue Service. Retirement Topics – QDRO – Qualified Domestic Relations Order
6
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
7
Internal Revenue Service. Instructions for Forms 1099-R and 5498
8
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Office of the Law Revision Counsel. 29 U.S. Code 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity