Many marriages include one spouse who understands the basics of investing and the other who has no idea what is happening. If this sounds like your marriage, this post is for you.
Both spouses do not need to be investing experts, but both need to be on the same page, working together toward shared retirement goals, and this post will help.
Our goal is for the investing novice in the relationship to use this post to gain enough understanding of the investing fundamentals necessary to invest for retirement and have meaningful conversations. If you’re an investing expert in a relationship, please read the post and send it to your spouse.
We wrote this series to provide enough about the basics of investing that couples can talk about their retirement goals.
I was motivated to write this post after seeing recent Gallup survey findings. Specifically, only 38% of U.S. adults are not invested in the stock market. A third more Americans believe investing in a home is a better investment than the stock market, which is untrue.
Part 2 of this series focuses on comparing the investment strategies from the Gallup Survey illustrated below.
Having the Conversation
Start with a Money Date. A money date is a scheduled conversation between you and your spouse in a comfortable environment that allows you to discuss your shared goals, values, and relationship with money. Money dates keep couples on the same financial page -- allowing both partners to control money in the relationship.
Money dates are referred to by some as household business meetings. Regardless of how you define it, you should speak regularly with your spouse about the household finances.
Dr. Michelle Kruger, CFP® She is currently a Senior Financial Planner at Gratus Capital and Part-Time Lecturer at the University of Georgia. As part of our Marriage Toolkit, Dr. Michelle Kruger shared practical strategies for discussing retirement planning with your spouse.
“Make sure you schedule something fun to do after your conversation about retirement planning.”
Dr. Kruger made the point that some conversations about money can be stressful, and to redirect any stresses you may feel toward your partner back toward any challenges that come with the retirement goal. It’s easier to compartmentalize those tough conversations by moving directly forward toward something fun together.
Employer Based Retirement Options
According to the Bureau of Labor Statistics, 73 percent of civilian workers had access to retirement benefits, with 56 percent of workers participating in these plans in 2023. Practically speaking, this is the most common way folks can invest for retirement.
Saving for retirement is a crucial step toward ensuring financial security in your later years. As a couple, taking advantage of employer-based retirement options can significantly boost your savings using common employer plans.
401(k) Plans
A 401(k) plan is a retirement savings plan offered by many private-sector employers. Employees can contribute a portion of their pre-tax income to the plan, and investments grow tax-deferred until withdrawal.
403(b) Plans
A 403(b) plan is similar to a 401(k) but is available to employees of public schools, certain non-profits, and tax-exempt organizations. Like a 401(k), contributions are made pre-tax, and investments grow tax-deferred.
Both plans typically offer a variety of investment options, such as mutual funds, ETFs, and company stock.
How Employer Matches Work
Many employers offer a matching contribution to your retirement plan. This means that for every dollar you contribute, your employer will add a certain amount, up to a specified limit. Here’s how it usually works:
Matching Formula
Employers might match 100% of your contributions up to 3% of your salary, and 50% of the next 2%.
Your Money
Often referred to as “free money,” employer matches are money the employer will provide to your retirement savings in the form of a match, making it important to contribute enough to take full advantage of the match.
Vesting Period
Some employers require you to stay with the company for a certain number of years before you fully own the matched funds. This is known as the vesting period.
Roth vs. Traditional Retirement Products
When you enroll in a 401(k) or 403(b), you might have the option to choose between Traditional and Roth contributions. Here's how they differ:
Traditional 401(k) or 403(b)
Tax Advantages
Contributions are made with pre-tax dollars, reducing your taxable income for the year. You won’t pay taxes on the money until you withdraw it in retirement.
Disadvantages
Withdrawals during retirement are taxed as ordinary income, which can be a disadvantage if you expect to be in a higher tax bracket in the future.
Roth 401(k) or 403(b)
Tax Advantages
Contributions are made with after-tax dollars, meaning you pay taxes on the money now. The big benefit is that withdrawals in retirement are tax-free, as long as certain conditions are met.
Disadvantages
You don’t get an immediate tax break since contributions do not reduce your current taxable income.
Comparing Roth vs. Traditional
Current Tax Situation
If you’re currently in a high tax bracket, a Traditional plan might be more advantageous due to the immediate tax break. If you’re in a lower tax bracket, a Roth plan might be beneficial since you’re paying taxes now at a lower rate.
Future Tax Expectations
If you believe you’ll be in a higher tax bracket during retirement, Roth contributions can be beneficial since withdrawals are tax-free. Conversely, if you expect to be in a lower tax bracket, Traditional contributions might make more sense.
Flexibility
Having both Roth and Traditional accounts can offer tax diversification, giving you flexibility in managing your taxable income during retirement.
Making the Right Choice as a Couple
Discuss your retirement goals and current financial situation with your partner. Consider these factors:
Contribution Limits
For 2024, the contribution limit for 401(k) and 403(b) plans is $23,500, with an additional catch-up contribution of $7,500 for those aged 50 and over.
Employer Match
Always aim to contribute at least enough to get the full employer match. It’s essentially free money that boosts your retirement savings.
Tax Strategy
Decide if you want the tax break now (Traditional) or later (Roth). A mix of both can provide balance.
Individual Retirement Options
An Individual Retirement Account (IRA) is a type of savings account designed to help you save for retirement with tax advantages. Unlike employer-based plans, IRAs are set up and managed by individuals, giving you more control over your investment choices.
Most financial experts recommend investing in employer based plans that include a match, and investing enough to earn the full match, before investing in individual retirement plans.
There are two main types of IRAs: Traditional and Roth.
An individual retirement account (IRA) is a retirement savings plan with tax advantages that taxpayers can use to invest over the long term for retirement.
A Roth IRA is a type of tax-advantaged individual retirement account to which you can contribute after-tax dollars toward your retirement.
Tax Advantages of a Traditional IRA
Pre-Tax Contributions
Contributions to a Traditional IRA are often tax-deductible, meaning you can deduct the amount you contribute from your taxable income for the year. This can lower your overall tax bill.
Tax-Deferred Growth
The money in your IRA grows tax-deferred, meaning you don't pay taxes on investment gains until you withdraw the money in retirement.
Tax Disadvantages of a Traditional IRA
Taxable Withdrawals
When you withdraw money in retirement, those withdrawals are taxed as ordinary income. This means you pay taxes on the money at your current tax rate during retirement.
Required Minimum Distributions (RMDs)
Starting at age 73, you must begin taking required minimum distributions (RMDs) from your Traditional IRA, which are subject to income tax.
Tax Advantages of a Roth IRA
After-Tax Contributions
Contributions to a Roth IRA are made with after-tax dollars, meaning you don't get a tax deduction when you contribute. However, the big benefit is that qualified withdrawals in retirement are completely tax-free.
Tax-Free Growth
The money in your Roth IRA grows tax-free, so you won't pay taxes on the investment gains as long as you follow the rules for qualified withdrawals.
No RMDs
Unlike Traditional IRAs, Roth IRAs do not have required minimum distributions, giving you more flexibility in managing your retirement savings.
Tax Disadvantages of a Roth IRA
No Immediate Tax Break
Since contributions are made with after-tax dollars, you don't get an immediate tax break. This can be a downside if you're looking for ways to reduce your current taxable income.
Income Limits
There are income limits for contributing to a Roth IRA. If your income exceeds these limits, you may not be eligible to contribute directly to a Roth IRA.
Comparing Roth vs. Traditional IRAs
When to Choose a Traditional IRA
If you expect to be in a lower tax bracket during retirement, a Traditional IRA might make more sense because you get the tax deduction now and pay taxes later at a lower rate.
When to Choose a Roth IRA
If you expect to be in a higher tax bracket during retirement, a Roth IRA could be more beneficial because you pay taxes now at a lower rate and enjoy tax-free withdrawals later.
Contribution Limits
For 2024, the contribution limit for both Traditional and Roth IRAs is $7,000 per year, with an additional $1,000 catch-up contribution if you are 50 or older.
Related: The Spousal IRA
Learn More
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