A question came up in my training group this week that I thought would be good to discuss in a broader audience. How is income generated from separate property treated in a divorce settlement and specifically, the RMD on a separate IRA?

First, as almost always, it depends on what state you’re in. In Arizona, income on separate is separate but in Texas, it’s marital. Job one is to know your state’s statutes and how to apply them.

Secondly, if we assume that income on separate is separate, as is the case in the majority of states, what about that RMD that was REQUIRED to be taken OUT of the separate property account? The answer lies in the destination of the funds. Did they go into an individually titled brokerage or bank account that ONLY received those funds and no others and didn’t get spent? Then it’s still separate property. Or did it go into a joint bank account or brokerage where funds moved in and out to sustain the expenses of the couple? Now it’s a presumptive gift to the marriage and has become transmuted to marital property. 

If you follow the money trail and apply logical thinking, the answers are almost always pretty obvious. In my world, I encourage my couples not to get too hung up on those details and just focus on finding a settlement that works for both of them.

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