On Jan. 1, 2019, alimony payments began to receive the same tax treatment as child support payments. This means that the person making the payments doesn’t get a tax break and the recipient doesn’t have to count payments as income. The rule applied to any divorce settlements finalized in Pennsylvania on or after that date. For those who weren’t able to take advantage of the old alimony rules, there are still ways to structure a favorable divorce settlement.
For instance, it may be possible to receive a portion of an IRA or 401(k) account balance from a former spouse. To split a 401(k) or other qualified account balances without an early withdrawal penalty, it will be necessary to obtain a qualified domestic relations order (QDRO). To avoid paying income taxes on retirement funds received in a divorce, the recipient should roll the balance directly into an IRA.
Those who receive funds from an IRA will still need to document the fact that the transfer is related to a divorce. However, there is no need for a QDRO. An early withdrawal penalty does apply for anyone under the age of 59 1/2 unless the funds are transferred directly into another IRA. Older people who are contemplating divorce may want to buy life insurance as a couple prior to doing so. This may provide coverage for both parties at a lower price that can be retained after a marriage ends.
A family law attorney is an integral part of any divorce team that a person puts together. Legal professionals may be able to help structure a settlement instead of having to rely on a judge to make the decisions.