Two methods new baby assist guidelines will have an effect on your retirement financial savings

Child support payments will be subject to new tax rules from 2019. That could mean big changes for your retirement accounts.

It’s all part of the Tax Cuts and Employment Act passed by Congress late last year.

Under the new rules, maintenance payments to an ex-spouse are no longer deductible. And the recipient of the money no longer pays taxes on this income.

The law applies to divorce agreements concluded after the turn of the year.

“If you already have child support and would receive it for another 20 years, the new law does not affect you,” said Ed Slott, founder of Ed Slott & Co.

However, getting divorced after December 31 means changes to how those payments can be made and what you can do with the money you received when it comes to your retirement accounts.

Payments through pension funds

If you are making child support payments, current regulations require you to pay cash to get a deduction.

But for divorce settlements made after the new rules went into effect, you can transfer funds from your retirement accounts instead.

That could offset the effect of the new rules, Slott said.

For example, when a spouse makes payments through an individual retirement account, they are giving away money that they would otherwise have been taxed if they had withdrawn, Slott said.

Once a receiving spouse takes money from the IRA, they pay taxes on that money.

“That way you create the same advantage that you would have had before the tax regime changed,” Slott said.

To take money from an IRA, the receiving spouse must be at least 59½ years old. Otherwise, they face a 10 percent penalty on those withdrawals, in addition to the taxes they normally owe on that money, Slott said.

A transfer from an IRA would be a one-time transaction that would need to be formalized in a divorce settlement. To expand your cash flow, you may want to receive just a portion of your alimony payments from a retirement fund, said Megan Gorman, a managing partner at Checkers Financial Management.

“This is where getting a financial planner or a CPA or a CFP involved in the process is critical,” Gorman said. “You can run through different scenarios where you might get part of your alimony payments through monthly payments, but another part of that will be paid to you as a lump sum through an IRA at the time of divorce.”

Likewise, the maintenance payer should carefully consider whether a direct use of funds from the retirement assets makes sense and does not endanger their financial stability.

retirement savings restrictions

The new tax rules could restrict dependents’ saving for retirement.

Because these funds are no longer considered taxable income, it is no longer possible to invest this money in an individual retirement account.

“For someone who isn’t working and only on child support, that could change what you can put into a retirement plan,” said Jennifer Silvas, senior tax associate at Sensiba San Filippo, an accounting and business consulting firm.

If you have other income, you can use this money to invest in a retirement plan.

If you don’t do this, you can still put the money you would have invested in an IRA or 401(k) plan into a taxable account.

“Most Americans aren’t big savers, so don’t use this as an excuse not to save for retirement,” Gorman said. “Any money you put away is helpful.”

More from Personal Finance:

Act now if you want to keep this tax break in a divorce
One in eight couples blames student loan debt for their divorce
Six strategies to get divorced without going broke