making spouse take 72t in a divorce in lieu of alimony

Submitted by Elaine Mulligan on Wed, 2018-03-14 14:41

Hello,

I am currently going through a divorce. My husband and his attorney are pushing me to take 72t from our retirement in lieu of alimony.

Is this legal? A possibility? Can the judge really agree to this? If so, what are the ramifications? How will this effect on me financially moving forward after the divorce?

Thanking you in advance,

Elaine



Submitted by Alan - IRA critic on Wed, 2018-03-14 17:18

  • Whose account is this now?  You cannot take distributions including 72t distributions until the account is split if it is currently your husband’s. If an IRA account, it is split by a court order (not a QDRO) for a transfer incident to divorce. Your share of the account would then be entirely yours and you could start a 72t plan subject to certain considerations based on your age and amount of the account compared to your needs. A 72t plan will currently generate an annual distribution close to 5% of the account balance.
  • The only requirement for the above is that the court must approve the IRA transfer, but the 72t is up to you as you would then have full control of the account. If the account is NOT an IRA, please advise.
  • Basically, a 72t plan provides you with penalty free distributions for IRA owners under 59.5. But these plans are rigid and if you ever need more money from the IRA due to emergency needs than the 72t plan generates, that is considered a modification to the plan and you will then owe retroactive penalty back to your first 72t distribution plus interest. Therefore, planning is vital before starting such a plan.
  • Note that there is a major change in the tax treatment of alimony for divorces effective AFTER the end of this year. The spouse providing the alimony will no longer get a deduction and the spouse receiving the alimony (you) will no longer have to pay taxes on it. Chances are that alimony payments will be reduced to offset this change, so the completion date of the divorce is now a major issue. It is hard to determine which option will provide you with the better long term security, but receiving part of the IRA provides you with more control, but the best value really depends on the amount of alimony vrs the amount of the IRA you receive, and if you receive alimony whether it will be taxable or not based on the date finalized. The 10% penalty is just something you can avoid on IRA distributions using a 72t plan, but you will still pay taxes on the IRA distributions, but perhaps not if there is a Roth IRA involved.
  • If your husband already has an active 72t plan using his IRA, please advise.
  • Have made some assumptions without the specifics of your situation, but you can correct or clarify your info if you wish.


Submitted by Elaine Mulligan on Wed, 2018-03-14 18:03

thank you for all that information!  The acct is my husbands IRA.i am 53 Year’s old yes, he is currently taking the 72t for the past 3 Year’s with 2 more to go.alimony is my better option I would think and waiting for the new tax laws is definitely a good idea!however, my worst case scenario on court date in August is that the judge forces me to take 72t in Lieu of alimony.  It will be a fairly large sum once split into my own acct but I still worry I could run out by the next 30 yrs of my life expectancy And that alimony would be more in my favor.and if this does happen, what are my options on how long I would have to draw from the 72t?thanking you in advance again,Elaine 



Submitted by Alan - IRA critic on Wed, 2018-03-14 21:28

The challenge with splitting an IRA with an active 72t plan is that the IRS has issued inconsisent rulings over the years, so there are risks involved, probably more so for your husband since he has already taken 3 years of distributions. In 1997, the IRS found that a plan would remain valid if the exact amount distributed was maintained in porportion. For example, if you received 50% of the IRA balance, you would be responsible for taking out 50% of the existing SEPP distribution and husband would have to reduce his by 50%.  In 2000, in another case the IRS found that the receiving spouse had no obligation to continue, but of course could start a new 72t plan. Also, in 2000 the IRS found that if the original IRA owner reduced his distribution in porportion to the transferred %, his plan would still be valid. That still leaves questions, such as when his distributions stop in 2 years, if yours can be stopped (for example to start your own new plan), or if you must continue until YOU hit 59.5. In summary, it would be best for you to receive the IRA and start your own plan because that would eliminate coordination or concern over what he does and when his plan ends. That said, if you were to receive alimony, how long would it last and what happens if he has major health issues or financial problems? Alimony would not be guaranteed. Conversely, if you receive your share of the IRA, you have the “bird in hand” and independent control of that money.



Submitted by Elaine Mulligan on Thu, 2018-03-15 12:37

Good morning Alan.  Again, thank you so much for the very helpful information.  The only thing I am still unclear about is. …if I do opt to take the 72t instead of alimony, my own 72t, is it until I am 591/2?  Or is it lifetime or can I only do it for 5 yrs?  Still very unclear on how long.Regards,Elaine   



Submitted by Alan - IRA critic on Thu, 2018-03-15 15:19

  • It must be for the longer of 5 years to the day or until you reach 59.5 to the day. Therefore, if you started one now, you would have to distribute the exact amount of your calculation each year until the year you reach 59.5. In that final year you have a choice of distributing nothing, the full annual amount or a pro rated amount by the month. At 59.5 your plan automatically ends and then you are free to take out as little or as much as you wish. There is no penalty since you will be over 59.5.
  • The calculation is only done once, just before you take your first distribution. There are 3 methods to choose from, the best one being the fixed amortization method because it produces the highest distribution per dollar balance in your IRA. The main variables are your age attained by the end of that year (12/31/2018), your account balance usually at the end of the last month before the distribution or even a couple months prior to that (use the highest available) and the 120% mid term interest rate for either the month before or 2 months before. The higher interest rates go, the higher your age, and the higher your IRA balance, the higher your calculation will be. You may want to consider partitioning your IRA into two accounts, one for the plan and another small one outside the plan to use for emergencies so that you do not bust your plan if you suddenly need more money. Several additional planning pointers are available at the best 72t planning and information site “72tonthenet.com”. You may wish to google that.


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