The typical American family reflected in iconic television shows of the 1950s and 1960s, in which the husband went off to work each morning and the wife happily played out the role of homemaker, is firmly in the minority. By 2012, the Bureau of Labor Statistics reported that six in 10 families with children have two working parents. What's more, the majority of Americans feel they need dual incomes in order to reach their financial goals.1
For a major goal like retirement, working couples need to be especially vigilant to coordinate their planning efforts in a way that supports their combined accumulation objectives. As you and your spouse execute your joint retirement strategy, keep some of the following tips in mind.
IRA Contributions and Deductibility
In 2015, you and your spouse can each contribute $5,500 to a traditional or a Roth individual retirement account (IRA), if you have sufficient taxable compensation (or earned income from self-employment).2 If you are age 50 or older, you can direct an additional $1,000 to your IRAs for a combined total of $13,000. Your eligibility to contribute to a Roth IRA is dependent on your filing status and modified adjusted gross income for the year. You also may be able to deduct all or a portion of your traditional IRA contributions if you satisfy Internal Revenue Service guidelines. For example, if you file a joint tax return, and neither spouse is covered by an employer-sponsored retirement plan, traditional IRA contributions are generally fully deductible up to the annual contribution limit.
If you both are covered by an employer-sponsored retirement plan, traditional IRA contributions will be fully deductible if your combined adjusted gross income (AGI) is $98,000 or less. The amount you can deduct begins to phase out if the combined AGI is between $98,000 and $118,000, and no deduction is allowed if it is equal to or exceeds $118,000.
Similarly, if one spouse is covered by an employer-sponsored retirement plan and the spouses file a joint federal income tax return, the spouse who is not covered by an employer-sponsored retirement plan may qualify for a full traditional IRA deduction if the combined AGI is $183,000 or less. Deductibility phases out for combined incomes of between $183,000 and $193,000, and is eliminated if your AGI on a joint return equals or exceeds $193,000. Note, however, Roth IRA contributions are not income tax deductible.
Coordinating Multiple Accounts
Like any investment portfolio, retirement accounts should work in unison to help you pursue a specific accumulation goal. However, with job changes so prevalent, it is likely that a couple may have multiple retirement accounts, including 401(k), 403(b), or 457 plans, rollover IRAs and possibly defined benefit plans. Because of the range of investment options offered under such plans, it is important to keep the big picture in mind in order to maintain a coordinated investment strategy. As you review your accounts, ask the following questions:
- Is your overall asset allocation in line with your objectives and risk tolerance?
- Are the portfolios adequately diversified? Are they overweighted (or underweighted) in any one asset class or individual security?
- Do the portfolios complement your other investments (e.g., taxable investment accounts, real estate and other assets)?
- Consider the fees associated with your retirement accounts and how they might affect returns. Would it make sense to consolidate some accounts to help minimize these costs?
Couples nearing retirement need to decide the timing of retirement account distributions in light of their income needs, tax situation and market dynamics. Among the issues to consider are:
- Tapping taxable and tax-deferred accounts. Conventional wisdom suggests that tapping taxable accounts first enables your tax-deferred accounts to continue compounding longer – and potentially growing larger – over time. However, there are also those who argue that waiting longer to tap tax-deferred accounts could result in larger required minimum distributions.
- Converting a traditional IRA to a Roth IRA, allowing you to put off distributions as long as possible and/or receive tax-free income.3
If one or both spouses are covered by a defined contribution (DC) and/or a defined benefit (DB) pension plan, you will typically be given several pay-out options to consider. These may include:
- A single life or joint life annuity – Typically the distribution method of choice for DB plans, a single life option, pays out a fixed benefit for your lifetime; the joint life option continues paying some portion of the benefit upon death to another party, typically the surviving spouse. DC plans may also offer the option to annuitize, convert all or a portion of the account balance to a guaranteed stream of income for life.
- A lump-sum payment – Typically an option for both DB and DC plans, in which the full value of the account is paid out upon retirement. It is up to you to then decide whether and how to reinvest the proceeds.
You can begin receiving Social Security payments as early as 62, although delaying the election increases the monthly total. Married couples may want to consider first tapping one spouse's benefit and delaying the other one’s until age 70, which maximizes the income and may substantially increase the couple's total Social Security payout over a lifetime.
Determining when and how to claim Social Security benefits is a complex matter involving many variables. Please contact me for assistance in considering the particulars of your situation as you and your spouse plan for retirement.
1 Forbes, "4 Dual-Income Households Tell All: How We Save and Spend" November 4, 2013.
2 If an individual has more than one IRA, the limits apply to the total contributions made in the aggregate to all the Traditional and Roth IRAs an individual owns.
3 A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. A 10% penalty tax will apply on funds converted to a Roth IRA, if those funds are withdrawn before five years have elapsed unless the owner is age 59 ½ or another exception applies. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
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