How new alimony tax rules may affect retirement savings

Because of changes related to the Tax Cuts and Jobs Act (TCJA), alimony payers in Alaska will no longer be allowed to deduct payments for tax purposes. Recipients will also no longer have to pay taxes on payments. Additionally, the TCJA rule changes will affect retirement account options for divorced couples on either side of the alimony equation. However, the new law will not apply to alimony arrangements already in place before the TCJA officially goes into effect.

With alimony payment through retirement funds under existing rules, a spouse would have to pay to receive a deduction. But with a proper divorce agreement, funds could be transferred from retirement accounts in a way that benefits the paying spouse. If an ex-spouse makes payments from an IRA, for instance, they will be using funds that would have otherwise been taxed if they had been withdrawn. The receiving party, however, would have to pay tax on money taken from the IRA. Such transfers are one-time transactions that would need to spelled out in a divorce agreement.

Some financial planners advise clients to consider getting part of their payments through lump-sum payouts and the rest from traditional recurring monthly payments. Paying parties may also want to be cautious about using retirement funds in this way to avoid compromising financial security. Alimony recipients will not be able to invest their payments in an IRA under the TCJA since those funds won't be considered taxable earned income. For recipients of alimony without other earnings, it will still be possible to place funds into an account that is taxable.

An attorney with knowledge of family law for husbands can offer advice on how to make arrangements for alimony payments when the TCJA goes into effect. Furthermore, legal counsel could help make alimony less disruptive to a client's retirement nest egg by negotiating a mutually agreeable and beneficial divorce settlement.

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