Financial Advice for Newlyweds

Question

My wife and I are newlyweds, and we are fortunate enough to have little debt and respectable incomes - since StackExchange is neither anonymous or private I won't disclose the real numbers, but I can describe our general setup:

We currently run the house via joint checking (ex. rent, groceries, etc.) and joint savings (ex. house/car down payments, emergencies); beyond that we retained our private checking accounts for personal holdings.

Both of us have retirement plans. She a 401k that her employer supplements (not sure the %). I have two, one is CalPERS state retirement which is formulaic (unalterable) and the second is a 457 that I pay into each month (not supplemented). Both of us are 25+ years from retirement.

We will be debt free (no loans, no cars, no house payments, no credit card) by May 1st, and will be looking to buy a home within the following 12 months. Within two years after purchasing the house we would like to invest in peer-to-peer lending.

I am looking for advice on best practices for newlyweds, to get their fiscal lives off to the best start. Topics of interest include:

1. Joint Tax Filing - What are the real benefits of doing such? Note, we've been married since October 2011.

2. Optimizing Exemptions - We need help finding that sweet spot where we maximize our claimed exemptions (freeing up monthly income for tax-deferred investments like 401/457), without owing tax money at the end of the year.

3. Financial Strategy - How can we optimize deductions to position ourselves in the best possible tax bracket?

4. Making the most of compound interest - does it make sense for us both to focus on overloading one person's retirement account to get the interest ball rolling? or should we contribute equally to each? It seems the first scenario is financial best, but I could be naive here...

Anything else is welcome and encouraged. Thanks in advance for your time and efforts.

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EDIT: To clarify #2

Let's say my exemptions are 0 right now and I get a 2k return... what I'm trying to do is find the magic number of exemptions to forfeit a my tax return in favor of freeing up as much money possible to invest in my tax deferred 457, without owing tax at the end of the year.

As for kids... we are planning on one here in a year, and the scenario above, its already accounted for... :)

Answer 1

1 - in most cases, the difference between filing joint or married filing single is close to zero. When there is a difference you're better off filing joint.

2 - The way the W4 works is based on how many allowances you claim. Unfortunately, even in the day of computers, it does not allow for a simple "well my deduction are $xxx, don't tax that money." Each allowance is equal to one exemption, same as you get for being you, same as the wife gets, same as each kid. 3 people X $3800 = $11,400 you are telling the employer to take off the top before calculating your tax. She does this by using Circular E and is able to calculate your tax as you request. If one is in the 15% bracket, one more exemption changes the tax withheld by $570. So if you were going to owe $400 in April, one few exemption will have you overpay $170. i.e. in this 15% bracket, each exemption changes annual withholding by that $570. For most people, running the W4 numbers will get them very close, and only if they are getting back or owing over $500, will they even think of adjusting.

3 - My recently published Last Minute Tax Moves offers a number of interesting ideas to address this. The concept of grouping deductions in odd years is worth noting.

4 - I'm not sure what this means, 2 accounts each worth $5000 should grow at the same rate if invested the same. The time it makes sense to load one person's account first is if they have better matching. You say you are not sure what percent your wife's company matches. You need to change this. For both of your retirement plans you need to know every detail, exact way to maximize matching, expense ratios for the investments you choose, any other fees, etc. Knowledge is power, and all that. In What is an appropriate level of 401k fees or expenses in a typical plan? I go on to preach about how fees can wipe out any tax benefit over time. For any new investor, my first warning is always to understand what you are getting into. If you can't explain it to a friend, you shouldn't be in it. Edit - you first need to understand what choices are within the accounts. The 4% and 6% are in hindsight, right? These are not fixed returns. You should look at the choices and more heavily fund the account with the better selection. Deposit to her account at least to grab the match.

As far as the longer term goals, see how the house purchase goes. Life has a way of sending you two kids and forcing you to tighten the budget. You may have other ideas in three years. (I have no P2P lending experience, by the way.)

Last - many advise that separate finances are a bad path for a couple. It depends. Jane and I have separate check books, and every paycheck just keep enough to write small checks without worry, most of the money goes to the house account. Whatever works for you is what you should do. We've been happily married for most of the 17 years we've been married.

Answer 2

Make sure you have sufficient insurance. Luckily, my wife and I had insurance on our mortgage, and term life insurance on both of us. Statistically speaking, insurance is a poor investment. However, when my wife was killed 263 days after our wedding, I was very happy to have it. Note that it took almost five months to pay out, though this was partly due to a Canada Post strike earlier this year; as such, you'll need sufficient emergency funds. I was able to continue working (just about), but still needed approximately $30,000. $10,000 within 24 hours, another $10,000 within 7 days, and the remainder sometime later, to cover funeral expenses.

You may also want to consider a will. Neither of us had one as we both had made the decision that we were fine with the other partner receiving the entire estate. If you are not happy with this, or if your situation is more complex, you'll need a will.

Answer 3

Regarding #1: use the free online version of turbotax and start to play with the numbers for the different options for filing. It can make a difference, based on the imbalance between the couples income. Also filing married but separate can eleiminate some deductions/credits.

Regarding #2: when you submit your taxes use the forecasting tool in turbotax to see if you should adjust your withholding. 2012 will be tricky because unless you changed your withholding in early 2011 to account for the change in status, your refund/owe number for 2011 will be unrelated to what will happen in 2012. Make sure you meet the safe harbor requirements, enough withheld to equal the previous years tax.

Joe Taxpayer tried to give you a formula regarding exemptions, here is another explanation: Each exemption is worth a percent of $3800. If you are in the 10% bracket that means it is worth $380 per year. If you got a big refund or wrote a big check, adjust accordingly.

Regarding #4: getting a match is great. Make sure you leave nothing on the table. Other than that it won't make a difference which one you pick. Look at the funds available, investment types, expenses and go with the one that makes the most sense to maximize. Remember you are not getting interest on the 401Ks you are investing and getting returns. There is no way to know which investment fund will be better in 2012.