By: Cary B. Stamp, CFP®, CDFA™

Recent court rulings in Florida divorce cases have held that when the alimony calculation is made in a divorce case, all “available sources of income,” including potential withdrawals from equitably distributed IRA and retirement (“Qualified”) accounts should be included (Niederman v Niederman 60 So.3D 544)  These cases have held that even if the recipient is under age 59 ½ and not normally eligible to make a withdrawal without a penalty they may do so using an exception to the normal rules under IRS rule 72(t). The exception in rule 72(t) allows the holder of an IRA or qualified retirement account to make distributions without penalty provided that those distributions are made as a series of substantially equal periodic payments and continue for the greater of 5 years or until the participant reaches age 59 ½.

IRS instructions on using a 72(t) distribution can be found on the IRS website:

http://www.irs.gov/retirement/article/0,,id=103045,00.html#4-

Fortunately, the court ruling in Niederman V. Niederman only requires the distribution of earnings on retirement accounts and not the invasion of principal. In that case, both financial experts agreed that a 5% withdrawal rate would not require invasion of principal. Ironically, that case was concluded in 2008 and could not have foreseen the significant declines in the equity markets or the low interest rates we experience on deposits today.  From the prospective of a financial planner, the ruling makes little sense in calculating income. As a practical matter, almost none of our clients choose to draw income from their retirement plans before age 59 ½ and many clients choose to delay those distributions as late as possible until age 70 ½.  The ruling, like most of the laws regarding alimony in Florida, also fails to take into account the effect of inflation on future income needs.  While 72(t) distributions may have a waiver of the penalty of these withdrawals, taxes are always due on these distributions at the time they are made (Roth IRA’s are excluded if the rules are followed).

If we have historic inflations rates of close to 3% and investment returns on a conservative portfolio could average 5%, then the “safe” net withdrawal rate of income on these accounts should be closer to 2%.  Again, as a practical matter, many divorced women are not in a position to take risk with their portfolios and with current rates on fixed income investments at mutigenerational lows, even using a 5% return calculation is aggressive. The conclusion that I draw from these observations is that using rule 72(t) as a source of calculating income available to a divorcee places a significant burden on the non-working spouse and creates a situation where they may easily outlive their income.  Other court rulings have included the finding that alimony payments may not contain a “savings component” even if this was the standard practice during the marriage. I would argue that including an index for inflation in alimony calculations is not a reflection of savings—it is a reflection of reality. Inflation will happen and portfolios will need to be invested to take inflation into account.

Florida Statute 61.082(g) requires the use of “all sources of income available to either party.” There is little question that this issue will continue to be litigated unless there is a change in Florida Statutes that eliminates qualified assets as a “source of income.” While it makes a compelling argument from the spouse who is compelled to pay alimony, it does not make sense as a long-term financial strategy for either party. The courts have also indicated that the ruling cuts both ways and that the payor spouses’ “ability to pay” should also include using 72(t) distributions as a strategy for calculating available income. While it appears that current case law states otherwise, it would be difficult to find many financial professionals who would advise their clients to make pre-59 ½ distributions from their qualified accounts to pay for anything. Rarely is that a prudent financial or tax strategy.

Other Cases relevant to the 4^th District Court of Appeals in Niederman:

Donoff v. Donoff              940 So.2d 1221

Mallard V. Mallard           771 So.2d 1138

Diffenderfer v. Diffenderfer 491 So.2d 265

Castaldi v. Castaldi           968 So.2d 713

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