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Do individual retirement balances matter for a live-happily-ever-after married couple?

Say both spouses qualify for a workplace retirement plan. Spouse A enjoys a company match for x% and has many fund options available (with great performance!). Spouse B gets no company match with few fund options and awful performance.

If the couple is looking to increase their retirement savings (Spouse A is already getting the max company match) - should they:

  1. Increase the contributions for Spouse A with no increase for Spouse B, as this is likely to result in the greater amount saved?
  2. Make sure both Spouse A and Spouse B are saving the same % of their salary into their respective workplace plans?
  3. Modify the contributions such that each spouse would have 50% of the retirement savings (Spouse A makes more than Spouse B)?

I believe the answer is 1, but I can't find any information to back it up. For some context, the two spouses in question are currently right around 40 years old.

  • 5
    I know you stipulated a live-happily-ever-after marriage, but, just so you know, it might not matter that much in case of divorce, either. Depending on your state, assessment of who gets what money is more robust than "whose name is on what account." If all the money is in one person's name simply because they get a better match, that reasoning would be a significant factor in determining what happens. – Mike Haskel Jun 2 '15 at 1:50
  • I understand 401k and traditional IRAs are subject to required minimum distribution after age 70.5 but am unsure if the function is linear or progressive in such a way that there is a game in balancing accounts. I would appreciate an answer that addresses RMD. – user662852 Jun 2 '15 at 13:14
  • When a person reaches age 70.5 the required minimum distributions require a specified percentage withdrawal from that person's IRA account(s) each year, which of course is taxed. That makes it more advantageous to put more savings in the younger person's IRA if their two ages are significantly different. – ScottMcP-MVP Jun 2 '15 at 21:16
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I would also choose 1 in that instance, up until Spouse A reaches maximum contribution, then contribute to B anyway because the tax savings still probably outweigh the lack of match and poor fund options.

Of course this is overlooking a lot of other things, like the tax situation of the couple, and IRA accounts.

These days many career-minded folks can't stay at a single job for all that long, so Spouse B's poor fund choices can end up moot since after a few years the (hopefully sizable) balance can be rolled over into an IRA where the funds can be chosen at will.

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    +1 but keep in mind, there are some awful fund choices out there. A 2%/yr expense can quickly wipe out the saving from tax deferral despite a lower retirement bracket. – JoeTaxpayer Jun 2 '15 at 2:30
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I'd suggest an option 4: Contribute to 401k accounts only up to the match, then switch to a Roth IRA for either or both spouse, and only when you've reached the cap should you go back and contribute to the 401k - choosing the one with the best options before switching to the other.

The reason for the Roth IRA is that it will give you more options than either of the 401k options, is not tied to an employer, and gives you options for withdrawing your contributions that can act as a handy back-up emergency fund.

  • I agree with this, with the minor caveat that I'd choose a Traditional over Roth IRA if it's deductible. – Craig W Jun 3 '15 at 1:26
  • @CraigW - I disagree with you on that one Craig, because a Roth IRA has much more flexibility as far as withdrawing contributions, but to each his own. – Jared Jun 3 '15 at 23:03
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I raised a comment on the original question about required minimum distributions (RMD).

I did a little spreadsheet to answer my own question to my own satisfaction about RMD. There is a function-of-age component of calculated RMD after age 70.5, with a lookup table published here:

http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

One-liner: If the spouses are different ages, and you have a goal to maximize your estate, option 2 or 3 can be valid because of RMD. 8 additional years of tax deferral in the younger spouse's account before RMD can be worth the 1% spread in returns.

Motivation: One of the known gotchas of RMD (which applies to 401k and trad IRAs but not Roth IRAs) is that it can force you into higher marginal tax brackets year over year by a process that you have no control over in retirement. If stacked on social security or other sources of income, this will reduce the marginal value of your IRA in the future, or cause taxable capital gains or dividends to be taxed at much greater than 10-15%. If you are on the cusp of "upper middle class" this is something to consider; if you are aiming for the middle of middle class, you will probably need more than RMD to live on anyway, and thus this less of a consideration for you. Congress could always change the capital gains rates back or do another wholesale Gramm-Rudman style overhaul, enact Mike Huckabee's FairTax, etc. so compared to other answers, this is both esoteric as well as making decisions for 40 years from now on top of the sandy clay that is US tax policy. That said:

Summary: Based on assumption of a 1% spread in returns for each spouse, a split can be sensible for the goal of estate maximization and retirement income bracket gaming with an age spread of around 8 years (so if one spouse is 40, and one is 32, they ought to split; either option 2 or option 3 in the OP). The 8 additional years of tax deferral in the younger spouse's account before RMD are worth the 1% spread in returns.

If the spouses are the same age or spouse A is younger, maximize on spouse A.

I hope the screenshot is self-evident, but I can elaborate. The lines mark hidden years.

enter image description here

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