Retirement savings for spouses is a big issue in families. Most couples have one adult who is the “primary wage earner,” and one adult who has less income.
One frequent result of income inequality is inequality in the retirement savings of the two adults. The main earner may have a tax-advantaged, employer-sponsored account such as 401(k), 403(b), TSP. The main earner may also contribute to an Individual Retirement Arrangement (IRA.) The other partner may not have any retirement savings at all, or much less.
So What? Why Does This Matter?
This isn’t great, from an economic view or from a relationship view. I’ve been trying to decide which one is more important, but I just can’t. I try not to get into relationship stuff here, but I think this issue is very tied up in the emotions and I’ll try my best to explain.
Any sort of economic imbalance is stressful on relationships. For most couples, a fully integrated financial life is an important part of the solidifying of their marriage. Striving for balance in retirement savings promotes feelings of security in the lower-earning spouse. How do you think it feels to have someone say, “It is important to me that we save as much money as possible for you.” What an amazingly powerful message that sends.
The practical aspect is also important. Every relationship ends, either due to death or divorce, and the lower-income partner often suffers financially. More balanced retirement savings decreases the gap between the finances of the two partners.
Lastly, because there are limits on how much you can contribute to tax-advantaged retirement accounts, having two people contributing means that you can contribute more each year.
Unfortunately, retirement accounts aren’t set up to be integrated. They have to belong to an individual, even though you can make someone the beneficiary of your account if you were to die.
Ways To Add Balance
Fortunately, there are some easy ways to increase retirement savings for spouses who may not earn as much.
First, start an Individual Retirement Arrangement (IRA) for the lower- or no-income spouse. IRS regulations allow the same contributions for a non-working spouse as for the working spouse. The couple needs to have enough earned income to cover both contributions. They are sometimes referred to as “spousal” IRAs, but they are just regular IRAs. There’s no special account to open.
Second, if the lower-earning partner has a job, sign up for any employer-sponsored retirement savings plan and focus on saving within this account. When job-hunting, give priority to jobs where the company offers 401(k) or 403(b) participation for part-time employees, and more priority to those who provide company matching funds for contributions. Be sure to check the eligibility requirements so you can make a good comparison. This may include how long you have to work before you can contribute.
Even that $13 per hour Starbucks job can boost your retirement a lot if you are able to contribute a significant portion of your pay and take advantage of the company match.
The third, and more complicated, way to is to start a small business and open a SEP, Simple, or Solo 401(k) account. These accounts usually have much higher contribution limits than employer-sponsored plans, which allows you to grow your savings more quickly. However, you’ll have to create some sort of self-employment income (even home party plans county) and then set up an account. Your bank, credit union, or investment institution should be able to help you choose the right account, establish it, and make funding arrangements.
It will require a little extra effort to ensure that retirement savings are balanced between both partners. The effort is worth it: a more positive financial relationship, more savings overall, and a better distribution of assets. I encourage you to figure out how your family will make retirement savings a priority for both spouses.
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I agree, but think it needs to go further. If you are not in a community property state, create a legal, written agreement that says all the deferred compensation and long-term saving/investment accounts are joint property.
Then, if the partnership dissolves, these assets are split fairly.
Of course it’s a whole lot easier to make this part of the process of getting married – if you’re near a split-up, the high earner won’t be as agreeable and the low/no earner will have to take what the divorce court decides.
Of course, you also have the obligation (and right) to participate as equals in the management of the accounts. So, keep reading Kate’s blog and learn your way around an account statement!
Live Long and Prosper – Leah, the MoneyDiva.com
Can a spouse with a TSP fund transfer traditional TSP funds to their spouse’s Roth IRA after in retirement?
I understand the tax implications and strategies for post-retirement TSP transfers to a Roth IRA (outside of the TSP) but have not found confirmation for making the transer (i.e., direct rollover) to a “spousal” Roth IRA.
If I am understanding the question correctly, you’re asking if one person can transfer their $$ to another person’s retirement account? Generally no. They are individually owned. In cases of death or divorce, obviously, there are different rules.