Can Your IRA Be Used for Alimony?
You can withdraw money from your Individual Retirement Account to pay alimony. However, you might end up owing a 10 percent early withdrawal penalty on the amount, in addition to applicable income taxes if you own a traditional, SEP or SIMPLE IRA. It is easier and more cost-effective to directly transfer an IRA to your spouse pursuant to a divorce settlement.
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Early Withdrawals
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The fact that you can withdraw money from an IRA at any time is one of the account's great advantages. However, you might pay dearly for the privilege. If you take a withdrawal before you turn 59 1/2, the Internal Revenue Service slaps you with the 10 percent early withdrawal penalty. The IRS does have several penalty exceptions--among them, the ability to take up to $10,000 to pay for your first home. However, there are no penalty exceptions for alimony obligations.
Tax-Deferred IRA Withdrawals
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If you own a tax-deferred IRA, including a traditional, SEP or SIMPLE IRA, you must include any withdrawal as part of your taxable income for that year, in addition to paying the 10 percent early withdrawal penalty on the entire amount. Because you get a tax deduction on contributions to these accounts, the IRS taxes withdrawals.
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Roth IRA Withdrawals
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It may be cheaper to dip into a Roth IRA before you turn 59 1/2, because there is no tax or penalty for withdrawing the entire amount of your account's contributions, as opposed to its earnings. You may owe both taxes and penalties on earnings you withdraw early. The IRS has what it calls "ordering rules" for early Roth IRA withdrawals, and they are quite complicated. Consult with a tax professional to find out precisely what your tax burden would be.
Direct Transfers
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The IRS does allow you to transfer IRA assets to an IRA in your former spouse's name without tax or penalty. To do so, you will need a Qualified Domestic Relations Order, or QDRO, issued by a judge as part of a divorce settlement. The QDRO should say which of your accounts are subject to transfer, and how much of each your ex gets. Most people comply with the QDRO by making a direct transfer, meaning the trustee that holds the IRA assets electronically deposits the funds in a different account.
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