Couples and Money: When Together Is Better

If you’ve been married for a few years, you and your spouse have probably figured out which expenses and bank and credit accounts to share and which to keep separate. But when it comes to your big-picture finances—such as getting the most out of your retirement plans, coordinating health coverage and lowering your tax bill—the decisions get more complicated. In fact, the strategies that worked best for you as individuals can look entirely different when you approach them as a couple.

In 2008, Scott Godes of Rockville, Md., was working at a firm that didn’t offer a match for his 401(k) contributions. His wife, Deb, did receive a match. Instead of contributing to his 401(k), he used the money to pay off a home equity line of credit the couple had taken to upgrade their home, and she contributed enough to her 401(k) to capture the match. Their goal was to decrease their debts while saving as much as possible, Scott says. “We had to coordinate and recognize that we were doing things differently, but for the benefit of both of us.”

More than 10 years later, both Deb, who works in health care policy, and Scott, now a partner at a law firm, are maxing out their 401(k)s. With the help of their financial adviser, Darren Straniero, they’re balancing long-term savings with shorter-term goals, including shoring up their 529 college-saving plans (their older daughter is in high school) and planning a bat mitzvah for their younger daughter.

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Save wisely for retirement

Unlike bank accounts or credit cards, retirement plans can never be joint. But some couples fall into the trap of saving for themselves rather than for the household. A 2019 study by the Center for Retirement Research at Boston College found that dual-earner couples run into trouble when one doesn’t have a workplace retirement plan, such as a 401(k). The spouse with the workplace plan often neglects to save enough for two to live on in retirement, even though the couple has the advantage of two incomes. “People act like individuals no matter what,” says Geoffrey Sanzenbacher, who coauthored the study. His recommendation: Couples should stash a total of 10% to 15% of their household earnings, rather than their personal earnings, in retirement accounts.

Once you and your spouse have worked out how much to save, dig into the strengths and weaknesses of each of your plans. When Ann Gugle, a certified financial planner with Alpha Financial Advisors in Charlotte, N.C., meets with married clients, she’ll scrutinize the summary plan descriptions for each spouse’s retirement account. “The summary plan description is often overlooked, but it is a gold mine of information,” says Gugle. These documents can be long, so she recommends focusing on the sections that describe your contribution options and matches. For example, one of you may have a less-generous match or access to a Roth option.

After setting aside enough money so that each of you gets the employer match, if any, compare the menu of investment options, fees and any advantageous features to decide how you and your spouse should allocate your income. That’s especially important if you can’t afford to max out your plans. (The limit for 401(k) and most other workplace retirement plans is $19,500 in 2020, with catch-up contributions of $6,500 for those 50 or older.)

Say one spouse has a huge array of investments to choose from and the other has more-limited options. Start by picking the best of those limited funds—even if they are all, say, small-cap stock funds or international stock funds—and fill in the gaps from the other spouse’s menu of investments to balance out your overall portfolio.

Consider opening a Roth IRA as well. You invest in a Roth with after-tax dollars, and your money continues to grow and compound free of taxes. Withdrawals are also tax-free once you reach age 59½ and you’ve held the Roth for five years. If you and your spouse file your taxes jointly, you can each contribute up to $6,000 to a Roth IRA in 2020 ($7,000 if you are 50 or older) as long as your combined modified adjusted gross income is less than $196,000. The contribution limits then start to phase out, before disappearing completely once your MAGI hits $206,000.

If your income is too high for a Roth IRA, you may be able capitalize on after-tax or Roth savings in your 401(k), where you don’t need to worry about income limitations. If only one spouse has access to a Roth 401(k), consider focusing on the Roth for that spouse and traditional pretax savings for the other spouse, says Gugle. Or, some plans may allow employees to save after-tax money once they have maxed out their pretax deferrals, up to an overall limit of $57,000 in 2020 ($63,500 if you’re 50 or older). Depending on your plan, you may be able to roll that money into a Roth IRA each year as an in-service distribution.

If that isn’t an option, you can roll the after-tax contributions to a Roth IRA once you retire or leave your job (you’ll owe taxes on any pretax amount), and roll the earnings on the after-tax portion and pre-tax deferrals to a rollover IRA to continue tax-deferred growth.

It often makes sense to invest most of the Roth 401(k) in stocks to take advantage of the higher growth potential free from taxes, while opting for a more conservative mix in the traditional 401(k) because you’ll probably take that money out first. Your individual plans may look unbalanced, but think of them as a marital asset rather than two personal accounts, says Eric Ross, a CFP with Truepoint Wealth Counsel in Cincinnati.

You will need to get even more creative if only one spouse is working. One option for couples who file a joint return is for the working spouse to open and contribute to a Roth or traditional “spousal IRA” for the nonworking partner. In 2020, the couple can deduct up to $6,000—$7,000 if the non-working spouse is 50 or older—in contributions to a traditional IRA as long as the couple’s MAGI is $196,000 or less.

Jesse and Roxanne Lopez, who live in New Albany, Ohio, have mostly contributed to his retirement accounts for the past 14 years as she stayed home with their three children and he worked as an anesthesiologist. About six months ago, Roxanne launched her own business, MakeItJustSew.com. Once her website starts earning money, she plans to open a solo 401(k) or self-directed IRA to ramp up their retirement savings. Until now, they’ve been limiting themselves to the low-cost index funds offered through Jesse’s workplace account. But once Roxanne opens her own plan, she can choose from a broader mix of funds.

Coordinate Social Security benefits

You and your spouse can maximize Social Security by coordinating when you claim benefits. One solid strategy for a dual-income couple is for the higher earner to delay claiming until age 70. Benefits grow 8% each year after full retirement age until age 70. (FRA is 66 for people born in 1954 but it gradually rises to 67 for people born later.) Meanwhile, the lower earner could take his or her benefit earlier to provide income to pay expenses. Single-income couples may face a harder choice. Someone who hasn’t worked enough to earn Social Security benefits can’t claim a spousal benefit until the earner claims his or her benefit. If the couple can afford to go without Social Security income until 70, they may want to wait. If not, they should aim to delay claiming at least until full retirement age.

The class of baby boomers who can take advantage of the “restricting an application to spousal benefits” strategy is rapidly diminishing, but if you were born before January 2, 1954, you still qualify. The strategy allows the higher-earning spouse to restrict an application to spousal benefits only, giving the beneficiary some Social Security income (50% of the spouse’s benefit). Meanwhile, his or her own retirement benefit can grow until age 70. The beneficiary must be full retirement age, and the lower-earning spouse must have already claimed his or her benefit. To take advantage of this strategy before it disappears, be aware that some Social Security rep­resentatives may be unaware of the strategy. You may need to speak to a supervisor to resolve the issue.

Choose the best health coverage

Health insurance doesn’t come cheap for families: A survey by the Kaiser Family Foundation found that annual family premiums for employer-sponsored health insurance rose 5%, to an average of $20,576 in 2019. If you and your spouse can both access health insurance through work, you’ll need to choose between keeping your own individual plans or doubling up under one. If you have children, you can cover them under one parent’s plan or move the whole household onto a family plan. More employers are breaking their coverage options into tiers, says Tracy Watts, senior partner at benefits consultant Mercer, with the “employee plus children” category often costing less than “employee plus spouse” or “employee plus family.”

Add up the annual premiums for each option and subtract any incentives from your employer, such as a deposit into a health savings account (HSA) for a high-deductible plan. Factor in a spousal surcharge—roughly $100 per month among many large companies, according to Mercer. Consider the size of the deductible and out-of-pocket maximums. Do the same with dental and vision plans, in case one spouse has stronger coverage in those areas than the spouse with the most attractive health insurance.

Don’t forget to look for niche benefits, such as fertility treatments, mental health care or therapies for special needs. And check that your preferred doctors are included in the plan you’re leaning toward.

Finally, factor in how often you and your family seek treatment. If your family is healthy with few ongoing medical issues, a high-deductible policy that is eligible for an HSA may be the best choice; such policies typically come with lower premiums than preferred provider organizations (PPOs) and other plans (see What You Should Know About Open Enrollment). In a family high-deductible plan that is HSA-eligible, any one person or combination of people on the plan will need to meet the deductible (at least $2,800 for a family in 2020) before the plan starts paying out.

But the ability to save for current and future health care costs in an HSA is extremely valuable. Contributions are pretax (or tax-deductible if your HSA is not from an employer), the funds grow tax-free, and withdrawals for qualified medical expenses aren’t taxed. You can also carry over HSA funds from year to year to pay for health care far into the future. In 2020, you can chip in up to $7,100 for family coverage.

The Lopez family is covered under Jesse’s high-deductible health plan, and he maxes out his HSA each year. “We would save $2,000 to $3,000 in out-of-pocket costs with a PPO, but we chose the high-deductible health plan because it enables us to save in an HSA,” says Jesse.

If you and your spouse decide to keep separate plans, you still need to coordinate in one key area, says Ross. If one person in the household has a health care flexible spending account (FSA), the other spouse cannot contribute to an HSA. In general, the HSA is the more valuable benefit because you can roll over all unused funds, which isn’t the case with an FSA.

Lower your tax bill

For most married couples, it makes sense to file jointly. For the 2019 tax year, you can take a standard deduction of $24,400 ($24,800 for 2020), which is twice the standard deduction for married filing separately, and access a number of credits and deductions unavailable to couples who file separately. You can also use your spouse’s losses to offset your capital gains (and vice versa) and qualify for a $500,000 tax exclusion on profits from a home sale, rather than $250,000 for single filers.

But there are some scenarios in which you may benefit by filing separately. In 2019 and 2020, you can deduct only unreimbursed medical expenses that exceed 10% of your adjusted gross income. If you or your spouse has a lot of medical expenses, you may be able to deduct a portion of them if you report a lower adjusted gross income because you’ve filed separately.

Or, if you participate in an income-driven repayment plan for your student loans, you may save on your monthly payments when filing separately because the payments will usually be based on your income alone.

Finally, don’t assume that your de­cision to file jointly for federal taxes means you need to do the same at the state level, says Lynn Ebel, director of the Tax Institute at H&R Block. If you’re wondering which filing strategy makes sense, test both scenarios using software or speak with a tax professional about your situation.

How your credit affects your spouse

Your credit scores and reports reflect your personal credit history. But your creditworthiness can affect your spouse, and vice versa, depending on which loans you apply for together.

When applying for a mortgage as a couple, lenders will often pull your three credit scores—from Equifax, Experian and TransUnion—and use the middle score to assess your credit risk. For other types of loans, lenders may pull only one score per applicant and rely on the lowest score, or weight the scores. Either way, if one spouse has a high score and one has a poor score, the pair could end up paying a higher rate.

One solution: Let the spouse with the higher score take out the mortgage loan or buy the family car, assuming he or she has enough income to qualify. “Some people think that idea is absurd, because you’re a married couple and one cohesive unit for everything,” says credit expert John Ulzheimer, formerly of FICO and credit bureau Equifax. “But the only reason to apply jointly is if you need two incomes to qualify.”

Your credit score, along with your claims history, can also affect your insurance premiums if you combine home or auto insurance policies with your spouse. “If you have a fantastic credit history but tend to file claims, that could override your reputation and vice versa,” says Ulzheimer. Shop for auto policies both together and separately to see which wins out.