PAUL ANDERSON: One couple + two accounts = more benefits
| Friday, Nov 25 2011 12:00 PM
Last Updated Friday, Nov 25 2011 12:38 PM
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Paul Anderson
I lost my dad to cancer just over 10 years ago. He was a great man. I had always admired the love and respect he consistently showed toward my mom. I don't remember witnessing a time they ever fought or said an angry word to each other. It is through this example that I personally measure my successes or failures in my own marriage.
Both my mom and dad took their roles very seriously. My dad provided for our family financially and my mom focused her attention on the duties of home. It may have been that my dad felt if my mom had set up her own retirement account then he would in some way be failing in his duties. Whatever the reason, he chose to only set up and contribute to his individual retirement accounts.
My mother never invested anything in an individual retirement account because she relied on him to handle that part of their lives. This left her in a terrible struggle to understand her new financial situation and make decisions she had never had to face when he passed away at age 58. As much as it seems contrary to this perfect image I have of my dad, I realize he made a big, but far too common, mistake of being the only one to put money into retirement accounts.
Have you ever heard the phrase "it takes two"? Well, when it comes to planning for retirement those words could never ring more true. Many married individuals decide not to contribute to retirement accounts since they feel that their spouse is saving enough for the both of them. While taking care of each other is, of course, important, being self-sufficient is as well.
Just like having your own income, making your own retirement contributions can give you a greater feeling of independence and self-worth. You have more control over your future, and you're better protected against the unexpected changes that life has to offer. It's a sad fact that a large number of marriages in this country end in divorce, but it is a fact nonetheless. It's also possible, like in my parents' case, that something could happen to you or your spouse before you reach retirement age.
While financial independence is a good reason, it is certainly not the only reason why it's in both spouses best interest for each to contribute to saving for retirement. Another good one -- a great one, really -- is that it can save you significant amounts of money come tax time. We're talking potentially thousands of dollars due to how current U.S. tax law works.
Contributions made to most 401(k), traditional IRA and related retirement accounts use pre-tax money, which means it's deposited into your retirement account without your having to pay federal or state income taxes on it. Having both partners contribute funds to such a retirement account can reduce your taxable income significantly, which affects your tax rate in a positive way. However, Roth IRAs work differently. You pay taxes on the money before you put it in, but the money grows tax free.
Individuals can only put a certain amount of money in an individual retirement account each year. For example, it's $5,000 for an IRA, or $6,000 with an additional catch-up contribution if you qualify. However, with both of you contributing separately to your retirement accounts, you're allowed to save -- in some cases -- twice as much money as if just one of you contributes individually. This is true whether you file your taxes jointly or separately. Make sure you ask your tax advisor for details.
If one spouse fails to contribute to his or her 401(k) plan to the amount his or her employer matches, he or she is essentially turning down free money that the company would provide for retirement. In the end, not participating in your company's 401(k) could cost you much more than your contributions alone.
Typically, even if one of you doesn't work outside the home, the non-working spouse is still allowed to contribute to an IRA based on the income of the working spouse. Note that you may be subject to limitations on how much you can contribute if you and/or your spouse are considered high income. Make sure to check www.irs.gov for the most up-to-date information.
What it comes down to is that you should maximize the savings opportunities provided to you by your employer and the IRS. Like most things in life, it's up to you to take the initiative and get started. If you and your spouse don't have accounts for both of you yet, now is the time. Well, yesterday was the time, but now is the next best option.
In a marriage it's great to rely on your spouse for love and support, but when it comes to saving for retirement, take advantage of the benefits of contributing to your own plan. Believe me -- once both of you see the balance of your retirement accounts go up, you won't want to stop saving. Especially if you start saving early enough for your money to do some serious growing.
Paul Anderson is an investment advisor and Partner at Moneywise Wealth Management. He is also a host of the Moneywise Guys radio program on KERN 1180 weekdays 10 a.m. to noon. His website is www.MoneywiseGuys.com. Securities offered through: brokersXpress, LLC, Member FINRA/SIPC/NFA a Registered Investment Adviser, Corporate Office: 311 W. Monroe St., Suite 1000, Chicago, Ill. 60606,www.brokersXpress.com, 888-280-7030. These are Anderson's opinions, not necessarily those of The Californian.
