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Paying alimony with 401K funds

On Behalf of | Aug 13, 2020 | Divorce

During a divorce negotiation process, both spouses must work to come to an agreement on how they will split their marital assets and joint debts. In some situations, one spouse may need to pay alimony to the other person.

In addition to asset value, couples should pay attention to the tax consequences of the decisions they make as these may change their perspective on some decisions.

Alimony and taxation under the new tax law

As explained by Forbes, the Tax Cuts and Jobs Act that went into effect in 2019 changed income tax assessments for spousal maintenance payments. Instead of the recipient of these payments claiming the money on a tax return and paying all income taxes, the spouse ordered to make the payments assumes tax liability for the money.

Ultimately, the tax law change may generate more tax revenue for the government, leaving less money to be shared between the spouses. This reality may make many people re-evaluate the decision to include alimony in their divorce agreement.

The QDRO and alimony payments

According to the U.S. Department of Labor, a person with a 401K account may access the funds in that account to satisfy a property division settlement by using a qualified domestic relations order. They may also access the funds in an employer-sponsored retirement account to satisfy a spousal maintenance award via the QDRO.

The QDRO names the other spouse as an alternate payee on the account, allowing money to be paid directly to that person. When using a QDRO to pay alimony, the tax responsibility lands with the recipient instead of the person paying the alimony.

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