When Minnesota couples divorce, money matters and post-divorce financial stability typically receive a significant amount of attention. Those who are still contemplating such a step must keep the changed alimony laws in mind. Currently, any alimony paid in cash to an ex-spouse is tax deductible, but that will no longer apply after the end of 2018. Also, the recipient will not have to declare alimony as a taxable income as of Jan. 1, 2019. This new law has led to some financial advisers suggesting the higher-earning spouse should use a lump sum payment of his or her individual retirement account as a bargaining chip for alimony payments.
However, regardless of how attractive this may sound to the recipient, it must be carefully considered before such an offer is accepted. The paying spouse will have an indirect tax saving because he or she would have had to pay tax on funds withdrawn from the IRA, and although the transfer is tax-free, the receiving spouse will have to pay tax when withdrawing money from it. Furthermore, if the recipient withdraws IRA funds before he or she is 59 and a half years old, there will be a 10 percent penalty for early withdrawal.
In many divorce cases, the spouse needing support must re-establish a career and needs alimony immediately after the divorce. The only way in which that spouse can benefit from accepting the IRA is by leaving the funds untouched to receive the interest, and to benefit from the retirement benefits when it becomes penalty-free. If such an offer is accepted without consideration, the lower-earning spouse may be left in an unenviable position without any income, or having to pay tax on early withdrawals.
Anyone in Minnesota who is considering divorce may benefit from the support and guidance of an experienced divorce attorney — even if litigation is not considered. A lawyer can provide valuable advice about alimony and all other concerning matters. When an attorney is familiar with the circumstances of the client, he or she might be able to suggest alternative options to ensure post-divorce financial stability.