Can I pay alimony using my retirement funds?

On Behalf of | Feb 11, 2020 | Family Law | 0 comments

Spouses going through a divorce must evaluate so many elements of their lives to arrive at their final divorce agreement, including how they will split their marital assets and debts. Some divorcees may also have to pay spousal support to the other party.

The spouse who must pay alimony may feel concerned about their ability to afford this new expense, especially on a post-divorce budget. In some situations, they may have the ability to access their retirement savings to satisfy this requirement.

Retirement savings and withdrawals

As the name implies, a person establishes a retirement account with the intention of funding their retirement. Any money taken out of that account prior to reaching the age of retirement may result in paying excessive early withdrawal fees. These fees end up dramatically reducing the amount of money available during retirement.

If a couple’s divorce decree stipulates that one spouse must pay alimony to their former spouse, the payee may decide that withdrawing money from their 401(k) account allows them to do this. If they simply make the withdrawal and then pay their former spouse, they may be assessed the fees mentioned above.

As explained by the United States Department of Labor, a qualified domestic relations order (QDRO) allows the spouse receiving the alimony to be named as an alternate payee on the other spouse’s 401(k) account. With a QDRO in place, no early withdrawal fees are assessed on the distributions.

Taxes and the QDRO

A 401(k) account is funded with pre-tax funds, requiring disbursements to be reported and income tax then paid. According to the Internal Revenue Service, the spouse who receives money via the QDRO assumes tax responsibility for the amount.