One of the lesser talked about changes from the Tax Cut and Jobs Act is how it will affect alimony. Starting in 2019, the big difference is that the person who makes the alimony payments will no longer get to claim that money as a deduction. On the other side, the person receiving the payment does not have to pay taxes on that money. That is exactly the opposite of how it used to work.
But there is another change that could offset that new rule. That’s because there are now rules on how divorced people on both sides may or may not use their retirement accounts.
Under the new law, you can now make alimony payments by transferring funds from your retirement account to the payee. Doing this means you could still get the same benefit as before. By paying through an IRA you don’t pay tax on the money you use for your alimony payments. In addition, the receiving spouse would be taxed once they receive the money from the IRA.
However, the receiving spouse must be 59½ to take money from the IRA. If not they will also pay a 10 percent penalty on the withdrawals. Using a retirement account to pay alimony would have to be set up in the divorce agreement. And the payee should make sure that using funds directly form his or her retirement account makes sense.
There is another thing to consider. If you go this route, you can no longer invest money from retirement funds in an individual retirement account because those assets are no longer considered taxable income.