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Paying alimony with 401K account funds

| Feb 18, 2018 | Uncategorized

The financial impact of a divorce is one that may be felt in many way by people in Pennsylvania. Every day life gets more expensive as all of a sudden the same income has to support two homes instead of just one. On top of that, one spouse might be required to pay alimony to the other. 

Some people have had to resort to using their retirement money in order to satisfy spousal support awards. As explained by the United States Department of Labor, this can be done legally with the use of a qualified domestic relations order. The QDRO allows the spouse who does not own the 401K account to be identified as an alternate payee on the account. Once this is established, that person may be paid directly from the funds.

Alimony payments may be made monthly or on another cadence or in a one-time lump sum payment. The money paid in spousal support from a 401K account has been taxable to the recipient not to the payor. However, CNBC points out that the new tax code will mandate that as of January 1, 2019 alimony payments will be taxable to the payor not to the payee.

It is not completely clear yet if this will be the case for these payments made from a person’s 401K account but that may be the likely outcome. If that happens, the negotiation of alimony to be paid as well other elements of a property division settlement may well take a different course than it would before this new law.