Courtney ∙ Clark Law, P.C.Courtney ∙ Clark Law, P.C.
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Is an IRA a fair offer to replace an alimony payment in divorce?

The Tax Cuts and Jobs Act will change the way in which alimony is treated on income tax returns. Currently, the spouse who pays alimony after a divorce benefits because he or she can show it as a deductible expense on his or her tax return, while the receiving spouse must show it as a taxable income. This rule will change as of Jan. 1, 2019, and Illinois individuals who are considering a divorce next year might benefit from getting qualified advice about the best way to deal with alimony.

The receiving spouse is typically the lower earning party who must be careful in negotiations about alimony under the new laws because his or her post-divorce financial stability may depend on agreements made in advance. IRAs have become a bargaining chip by which one spouse can give the other a lump-sum payment as alimony in the form of an IRA. However, it might only be to the benefit of the payer who would have had to pay tax upon withdrawal of any cash from the IRA because transferring funds to another retirement account is tax free.

The spouse who receives the IRA, who will likely need the support to sustain a living, will have to pay income tax on any withdrawal from the account. If that spouse needs the funds before age 59 and a half, he or she will also pay a penalty of 10 percent for early withdrawal. However, if the recipient spouse can get along without the IRA funds, he or she will benefit from its tax-deferred growth, and it could provide a retirement income once it becomes available without a penalty.

Regardless of how amicable a divorce is, each spouse will want to look after his or own interests. For that reason, it might be a good idea to discuss any settlement offers by a soon-to-be-ex with an experienced Illinois divorce attorney. A lawyer could even be present during negotiations for a divorce settlement to ensure fair treatment of his or her client.

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Courtney ∙ Clark Law, P.C.
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Belleville, IL 62220

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