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.
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.
