Two ways new alimony tax rules affect your retirement savings

Personal Finance

Once a receiving spouse takes money from the IRA, they will pay tax on that money.

“By doing that, you’re creating the same benefit you would have had before the tax rule changed,” Slott said.

In order to take money from an IRA, the receiving spouse has to be at least 59½. Otherwise, they will have to pay a 10 percent penalty on those withdrawals in addition to the taxes they would normally owe on that money, Slott said.

A transfer from an IRA would be a one-time transaction that would have to be formally laid out in a divorce agreement. In order to expand your cash flow, you may want to choose to receive only part of your alimony from a retirement fund, said Megan Gorman, managing partner at Chequers Financial Management.

“This is where engaging a financial planner or a CPA or a CFP in the process is key,” Gorman said. “They can run various scenarios where maybe you get a portion of your alimony through monthly payments, but another portion of it is given to you in a lump sum through an IRA at the time of the divorce.”

Likewise, the party who is paying the alimony should also carefully assess whether using funds directly from their retirement savings makes sense and will not compromise their financial stability.

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