Recent research has indicated a rise in the divorce rate of older American couples belonging to the Baby Boomer generation. Commonly referred to as "gray divorce," these separations are often complicated to orchestrate.
Come January, matters will become more complex with the enactment of a new federal law that changes the way alimony is taxed. For those who suspect they will require spousal support after a grey divorce, readying for retirement will become a greater challenge if you wait to finalize your divorce in 2019.
What is the change?
On January 1, 2019, alimony will no longer be deductible by the payor or taxable to the recipient. The new law opts to tax the spouse who is paying alimony instead of the spouse who is receiving it. If it sounds like this is a benefit for the spouse receiving alimony, think again.
Because alimony payments are currently deductible for the paying spouse, the spouse has a larger portion of alimony to give. For the spouse receiving these payments, the income tax on alimony is a relatively small rate because of the spouse's lower income. Overall, less money is paid in taxes in 2018 than it will be under the new alimony law in 2019. In fact, estimates have found that the change will raise the government $6.9 billion over the next decade.
How does the new alimony law affect my retirement savings?
Under the new alimony law, those who are not working and receive alimony payments after a divorce can no longer claim the payments as earned income. That means the funds cannot go toward their IRA and Roth IRA accounts. Without a source of earned income, it will be impossible for these divorcees to build their tax-advantaged retirement accounts - which could create financial ruin for Baby Boomers.
Some argue that since spousal support is meant to cover living expenses, the funds shouldn't be invested or saved toward retirement. However, retirement savings are a necessary cost of living - even if that living is in the future. Part of a person's day-to-day living expenses involves "spending" money toward retirement.
If you are in the midst of a divorce or considering divorce, it's important to know how changes in the law such as these may affect you. Contact an attorney to learn more about other changes in 2019 that could have a lasting effect on your divorce settlement. A lawyer can also help you through other legal complexities of gray divorce, such as asset division.