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Retirement savings can be affected by new alimony tax rule

Unless couples are older when divorcing in New York, retirement is probably the last thing on their minds. For a long time, this may have been just fine. However, the new tax reform that took effect in 2019, made changes that could cause spousal support to affect retirement plans.

CNBC notes that the ex-spouse paying spousal support can no longer deduct this amount from their taxable income. The spouse receiving the income may no longer pay taxes on the income provided. In the past, divorcees had to pay spousal support in cash. However, the new rules allow people to make transfers from their retirement account.

When a spouse makes payments using money from an individual retirement account, they may not pay taxes for the transfer. Meanwhile, the divorcee receiving the income would pay taxes. This creates a similar situation to what it was like before the tax reform.

Using retirement accounts works best for older couples or the receiving spouse may also need to pay a 10% penalty if they are younger than 59 and a half. If the spouse is younger but is not solely financially dependent on their ex, they can set that money aside for retirement.

Using the IRA to make divorce payments would also be a one-time transferal, not a month-to-month commitment. Some breadwinners prefer this larger settlement, because it creates a better severing of ties so they can move on, which would have otherwise been maintained by continued payments.

Forbes adds an interesting twist to the alimony payments and their effect on taxes. It points out that even though the payer cannot deduct taxes at the federal level, some states still allow it at the state level. Among them are California and New York.

This article provides information on spousal support. It should not be misconstrued as or used in place of legal and financial advice.

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