Is Money Withdrawn from an IRA “Income” for Child Support Purposes?

 

It is common for a child support payor to be required to pay a percentage of any additional income above and beyond a base percentage of his or her income.  This additional income may include, for example, bonuses, commissions, or work from side jobs.

Illinois courts define income as “something that comes in as an increment or addition… a gain… that is usually measured in money.”  They have held that income can include a lump-sum worker’s compensation award, military allowance, deferred compensation, and the proceeds from a pension.  Some Illinois courts have also included disbursements from an IRA as income for child support purposes.  In such cases, if the child support payor’s judgment requires him or her to pay 20% of any additional income earned as child support, and he or she withdraws $100,000 from an IRA, the child support payee would be entitled to $20,000 in child support.

ira child support

This is the rule that circuit courts in the Second Appellate District are required to follow.  In the case of Marriage of Lindman, the Second District Appellate Court has held that IRA disbursements constitute income for child support purposes even where the IRA was part of a property settlement.  In the case of Marriage of Eberhardt, the First Appellate District followed this precedent.  This rule seems quite unfair at first blush, because the child support payor did not necessarily “gain” anything in addition to what he or she already had, that is, basically a savings account with tax restrictions.

In the case of Marriage of O’Daniel, the Fourth District Appellate Court disagreed with the First and Second Districts.  The Fourth District follows the precedent that “except for the benefits a person gets from an IRA and the penalties he or she will incur if he or she withdraws the money early, an IRA is basically no different than a savings account.” It explained that the money in the IRA already belongs to the individual, and that a withdrawal is therefore not a “gain” or income to the child support payor.  The Fourth District did note, however, that any interest or appreciation earnings would constitute a gain, and thus income for child support purposes.

Given this, the issue of whether an IRA withdrawal constitutes income for child support purposes is unsettled, and depends on where in Illinois one lives (click here for a link to a map of Illinois counties and Appellate Court districts).  The First and Second Appellate Districts say that an IRA disbursement is income, while the Fourth District completely disagrees.  There are currently no Illinois Supreme Court cases that specifically address this issue either.  However, there are additional Illinois cases that address relatively similar situations, and may eventually aid the Illinois Supreme Court in setting this issue.

Marriage of Dillavou is a 2012 case from the Second District called that did not follow the precedent set in Marriage of Lindman.  However, it is unpublished and has no precedential value. In that case, the husband took a distribution from an IRA that was awarded to him in a judgment for dissolution that required him to pay 25% of his net income from all sources as and for child support.  He used the funds to pay for his trading losses, living expenses, and child support.

The court held that the IRA distribution should not be included in the calculation of income for child support purposes in this situation, because the IRA was allocated to him pursuant to the divorce decree and including this as income would result in “double counting,” which arises if he contributed to the IRA after the divorce and the contributions were considered as income in calculating support.  The court further reasoned that even if consideration of the IRA distribution as income would not be improper “double counting,” it could not say that the trial court was incorrect in finding that the distribution should not be included as income.  Again, the circuit courts in the Second District are not required to follow this case.

Marriage of Marsh is another Second District case that could shed some light on the situation.  In that case, the Second District held that the husband’s conversion of his stock into cash did not result in a gain for him, and that the resulting cash did not constitute income for child support purposes.  In doing so, it reasoned that it was irrelevant that the asset was in the form of stock rather than cash at the time of the dissolution of marriage because the stock was a liquid asset that could be readily converted into cash.  The court further reasoned that the conversion of stock to cash did not result in a gain for the husband.  The characteristics of the stock conversion could be analogized to that of an IRA distribution, as the receiver of the IRA funds is not gaining anything that he or she did not already have.

Marriage of Baumgartner is a First District case that could also be used to argue that an IRA distribution should not constitute income for child support purposes.  This case involved the proceeds from the sale of a home.  The First District held that the proceeds from the sale of husband’s California residence did not constitute income for support purposes, because he was unemployed after the divorce and sold the home to use the proceeds to purchase a residence in Illinois, where he obtained employment.  Ana analogy could be drawn to a situation involving an IRA distribution where the receiver of the IRA funds puts the money into another asset, such as a home.

The Illinois Supreme Court also issued potentially helpful precedent in the case Marriage of McGrath.  In this case, the Court held that money that a person withdraws from a savings account does not constitute income for support purposes.  It reasoned that the money in the account already belongs to the account’s owner, and that withdrawing it does not represent a “gain” or benefit to the owner.  The same argument and reasoning would apply for one who takes a distribution from an IRA.  It is already money belonging to the account’s owner, and the owner is not gaining anything he or she did not already have by withdrawing the funds.  Because McGrath only addresses the narrow issue of a savings account, however, it does not overrule Lindman in the Second District.

As one can see, the issue of the classification of an IRA distribution as income for child support purposes is unsettled in Illinois.  The line of cases above, however, could eventually lead to a change in Illinois precedent and consistency across the state, and settle this issue once and for all.

If you have questions about what constitutes income for child support purposes, please contact us.