Guaranteed Return: Shift Your Income


If you and your spouse make unequal amounts of money, you might want to consider this practice to get the most out of your retirement funds. Read about some of the tips I’ve discovered from switching with my own partner.

Getting your financial accounts together and coming up with a solid Investment Policy Statement takes some work. It won’t happen overnight. And that’s just when you’re arguing with yourself.

Getting on the same page financially with your significant other and coming up with shared goals is an entirely different level of complication. First, you have to make time to hash everything out and then implementing it can be a real challenge as well.

As I’m getting married later this year, I have plenty of recent experience with two busy professionals merging their finances.

It surprises me when I read about single income households where one spouse is earning all the money and the other spouse is staying at home. Perhaps it’s a function of living in NYC, but pretty much everyone I know is a dual-income household.

Yet, the pay discrepancy may be quite large between the spouses. In our situation, with one lawyer serving the greater public good and the other lawyer working in corporate law, in addition to the pay discrepancy we have entirely different types of access to retirement accounts.

As those of you who read my 2017 tax report know, one of the goals this year is to take advantage of all of our retirement accounts, regardless of whether they are in my name or hers.

As a refresher, I have access to a standard 401(k), Backdoor Roth IRA and Stealth IRA, which totals $26,900 of tax-protected space.

On the other hand, she has access to a 401(k), 457(b), Backdoor Roth IRA and pension plan for a total of more than $40,000 in tax-protected space.

We’d be silly to leave any of this on the table as every dollar deposited into one of these tax-protected accounts results in a reduction on our tax bill at a pretty high marginal rate.

Yet, what we really want to do is shift some of my income into her accounts. How do we plan on doing it?

Income shifting to take advantage of retirement accounts

Like many couples I know, we split the household bills in a way that makes sense to us and keep separate accounts. While we may have a joint account in the future, it seems highly likely that we’ll continue to have these personal accounts as well.

Since there’s no way for me to make direct contributions to her retirement accounts, the only path forward is for her to make the contributions directly and then for me to pick up extra expenses around the house.

Unfortunately (or fortunately?), an extra $36,000 in her 401(k) and 457(b) accounts alone is a significant amount of income shifting.

It’s also not as easy as it looks since it’s pretty difficult to achieve 100% accuracy when you’re calculating how much one paycheck will decrease once retirement contributions kick in (not to mention that they can often take weeks to get going in the first place).

After a few false starts, we seem to be on the right path. For those in similar situations, take a look at all of the retirement accounts open to both of you and see if you can take advantage of them all.

Here’s the tactics we used to make it go as smoothly as possible:

Step 1) Open All Accounts. Getting enrolled in the various retirement plans takes a lot of work just by itself. The first step is to simply open the accounts, even if the contribution amount is a minimum of 1%. Because it might be disruptive to open every account with a large contribution amount, we took the minimum 1% approach as a first step. It took over a month to get through all the paperwork.

Step 2) Target Income Shift Line Items. For the spouse that is shifting the income, it’s also going to take some work to figure out how you’re going to cover the “new” expenses. If you’re artificially setting your income, one of the first things you’ll have to do is figure out how much extra you’re going to need each month to cover these expenses. If you’re taking over student loan payments or other bills, you’ll have to get those accounts set up so they can withdraw directly from your accounts. We spent 2-3 weeks getting this set up during the same time we were opening all accounts.

Step 3) Dial In Retirement Account Contributions. Once the retirement accounts were open with the minimum 1% contribution, the next step for us involved dialing in the extra amount that we needed to contribute over the course of the year to max out the accounts. Luckily this doesn’t take as long as an increase in a contribution amount can take effect as quickly as one paycheck cycle.

Step 4) Pick Up The Extra Expenses. Like a relay runner handing off a baton, once one spouse begins making substantial retirement account contributions, the other spouse has to pick up the extra expenses to keep the previous financial balance in place. Expect a few bumps as you work out the kinks here.

As we’re nearing the end of the process, I can report that the effort was worth the work. Now we’re two people rowing in the same direction and looking at our finances holistically, leaving no tax-protected space on the table.

If you’re a dual-income household, I highly recommend that you take a similar approach and figure out a way to shift income from one spouse to another so that you can take advantage of every retirement account available to you. As a reminder, even if you’re a single income household you can still make a spousal Roth IRA contribution regardless of whether the spouse has earned income or not. I run into quite a few people that aren’t aware of this benefit.

Update: Well, we got married! That’s going to make our taxes fun. If you want to give us a gift at no cost to you, sign up with Zola (the fantastic company we used to organize all of our gift registries). We’ll get $50 for referring you and you’ll get $50 for signing up. Zola has a number of cool features: (1) you decide whether or not purchased gifts are shipped to you; (2) full support for third-party items; (3) return shipping is free if you don’t like or need the gift and (4) 10% off items on your registry that don’t get purchased.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money and is always negotiating better student loan refinancing bonuses for readers of the site.

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    Thirteen thoughts on Guaranteed Return: Shift Your Income


    1. We’ve been working toward this goal, and it’s a whole psychological mess as well as my spouse wants to feel as though he’s contributing and wants cash savings. This is reassuring and maybe will give us the extra push we need to finish working on what we’ve started.

      1. Psychological mess sounds right. Logistically difficult too because (in my experience) not too many people operate with the one simple checking account model, not to mention that different incomes definitely has an impact when making joint financial decisions. We haven’t “solved” everything by any measure, nor figured out a perfect solution, but we’re making slow and steady progress and trying to take a big picture view.

    2. I’ve tried thinking about the psychology of his and her accounts and how new couples could make the merger into marriage more smooth.
      I wonder if setting up a personal capital or mint account that has both partners accounts grouped together and see how retirment savings grows together.
      Maybe that would give the couple more ownership of each other’s retirment planning and spending and savings goals.
      It could help some couples more of a single mind.

      1. “Maybe that would give the couple more ownership of each other’s retirement planning and spending and savings goals.

        Curious if you think about this as two separate and distinct goals. I might be reading more into the bolded text than you intended, but I suppose that’s a key part of this analysis. We are looking at everything as singular accounts and goals, regardless of the name on the account itself.

        1. I didn’t mean to imply anything derogatory. I’ve read some couple plan for retirment separately. I’ve always wondered how that arrangement worked out, but some people seem to make it work.
          From my own point of view, I agree with you that looking at everything as contributing towards a single account and common goal would be a lot more fun and practical. I would want my wife to be able to retire when I could.
          Our first year of marriage we grew up a lot. I needed to grow more than her and we got more and more on the same page as far as financial goals. It’s always a work in progress though.

          Congrats on the upcoming nuptials!

          Tom @ HIP

    3. We manage our funds jointly out of a single account and before my wife’s becoming a stay at home mom the joint amount after contributions funded our investments according to tax advantaged accounts. It helps in my case that essentially I manage all investing for the both of us why she handles spending/savings rates. As such I just set everything up and provide the end number for her to work with,

    4. This is great advice. Another perspective to consider is couples with varying frequency of income.

      For instance, my girlfriend and I have similar base salaries, but she works in sales and I work in finance, and given the difference in compensation structures, our income fluctuates above our salary baseline and then spikes at year end when I get my bonus. Like you, we work in New York and mostly use separate accounts for joint expenses, but do have a joint credit and checking account – (we quickly stopped using the checking account to avoid any potential issues with the $14,000 gift tax penalty).

      On a month-to-month basis, our net income is somewhat lumpy considering commission checks she receives on top of her base, and my net income is heavily dependent on a one-time discretionary bonus at year end.

      We save and invest more of her income into tax-advantaged accounts month-to-month, and we use my bonus at year end to save for big ticket items in the next 2-3 years (wedding, home, travel, etc.), as well as play catch up to max my tax-advantaged savings.

      I will say it really takes a solid foundation of trust and alignment of mutual goals to be able to do this successfully, so kudos to you guys.

      -Conor
      http://www.millennialsavings.com

      1. Thanks for sharing how you handle it. Agreed that it does take some trust and alignment of goals to make it work. The process of getting it set up helped us a lot by bringing up the issues to discuss. Luckily we are on the same page!

    5. We’re one of those weird couples that reached FI on one (really good) income. I do wish we had the option of filling tax deferred accounts for both couples, but we have been very happy with this arrangement. Raising kids is a big job, but unfortunately a job with no 401(k) attached. Half of our money is in a taxable account.

      I have contributed the max to a spousal IRA for my wife for each of our 10 years of marriage. I actually opened and contributed to her IRA when we were engaged. We were thinking long-term from day one.

      Cheers!
      -PoF

    6. Would be great to see your thoughts on annuities. We’re a 30-something couple (biglaw + non profit) and a financial advisor recently suggested rolling over a legacy 401(k) (from a prior law firm) into a Jackson retirement annuity (minimum 6% annual guaranteed returns + guaranteed payments in retirement, though not sure how much). Was curious to know if you had any thoughts.

      1. Hi ZL – I’m a little late here, but Advice? Dump your “financial advisor” immediately. They get a very large commission for selling you on these annuities and the annuities are very rarely a good deal. You need to read the annuity contract VERY thoroughly – it is likely that the “salesperson” is not telling you everything. Are there additional payments you need to make during the life of the annuity? is the 6% pre- or post their fee? What is their fee? (usually high, often 2%-ish).

        Also, you need to do the math with regard to compounding!
        Recognize that the sp500 is getting about 9% annually. If you are 30 years from retirement and are rolling over 100K, then at 6% your 100K will grow to about 600K, but at 9% your 100K will grow to about 1.48MM. That 3% difference seems small, but is HUGE with compounding. That’s a difference of about 800K that you will be leaving on the table – NO WAIT – that’s a difference of about 800K that you will be handing over to your “financial advisor”. Seriously – they need to go. Get a fee-only financial advisor.
        https://www.forbes.com/sites/davidmarotta/2012/06/11/fee-only-financial-planner-whats-the-difference/#180bf9c83f24

      2. I’m a little late here too but writing about annuities is on my list of future blog posts. Managing Partner nailed all the points though. I’d run from that financial advisor. It sounds like he or she is acting more like a commissioned salesperson. An annuity is probably only a good deal if you want some amount of guaranteed income at the latter stages of life.

    7. “Since there’s no way for me to make direct contributions to her retirement accounts, the only path forward is for her to make the contributions directly and then for me to pick up extra expenses around the house.”

      This is how Mrs. Vigilante (paralegal) and I (attorney) end up saving more than half of our income. She has a pension, 457(b), and traditional IRA that she’d never be able to fill without me picking up the slack on other expenses.

      Which is also one of the primary motivations for our prenuptial agreement – I don’t want to be paying her some incredibly high spousal support based on assumptions in the law that aren’t true for us. My help today will actually keep her well ahead of me financially, and both of us could afford exactly or current lifestyle – plus some savings – without the other’s assistance. So spousal support per the court would likely be incredibly unfair to me! (Not that our prenup only favors me – it actually likely favors her, but this is one big benefit for me!)

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