Retirement Accounts and Child Support

What if I told you, you could assure yourself of a 25% return on investment? What if I suggested that in some cases, the return is much higher, and sometimes, even, 125% of your investment comes back to you, every year you contribute? Sounds impossible, but that’s the way the math works in child support in South Dakota.

You see, money that YOU contribute to a 401(k), IRA, SEP IRA, Roth, 403(b) or any other qualified retirement program is deducted from your income for purposes of child support. Essentially, the State wants to encourage people to contribute to their retirement, so they give you a straight deduction of every dollar you contribute to retirement (up to a maximum of 10% of your gross income) from the money you have available with which to pay (or receive) child support.

Having worked as a child support referee for some time, I have noted (and in some states, it is just the was it is calculated) that roughly 25% of a person’s take-home income is usually in the ballpark for a 1-child child support obligation. Now, that’s not perfect, but I often find that for someone who takes home a couple thousand dollars a month, $500 comes pretty close to a guess as to support (NOTE: this is a spitball number, and many, many factors go into its calculation). But for purposes of our example, we’ll use those numbers.

Thus, if you contribute $200 per month to retirement, that would make your take-home income $1,800 instead of $2,000, and your child support would be (again, just guessing and using round-figure numbers) $450 per month instead of $500. Thus, every month you contribute $200, you save $50 on child support.

If your company matches a certain percentage, you obviously receive a 100% return on all those dollars - you contribute 3%, they contribute 3%, so your $60 a month (on a $2,000 net income) instantly becomes $120 per month, plus the 25% you are saving on a child support obligation, becomes $135 per month.

There are problems with this math - first, it isn’t perfect (I’ve mentioned that enough now, I hope). Second, the notion of “I’m taking bread out of my children’s mouths” shouldn’t be overlooked - suggesting methods to reduce one’s child support always has a human component.

You should know, though, that this mainly only works for the parent who is paying support - not so much for the “custodial” parent - that’s because if the custodial parent contributes, he or she reduces income, but the parent who owes the support (the “obligor”) is now a slightly higher overall percentage, but of a slightly lower combined number. The obligor who contributes is a slightly lower percentage of a slightly lower combined income number - win/win for the obligor.

Just a tidbit for the day. Love your kids, and treat them right.