Does My Spouse Need a Separate Retirement Account? Key Considerations for Couples

Couples do a lot of things together. They share their homes, dreams, travels, and even financial goals. When it comes to retirement, there is typically a no one-size-fits-all approach, especially if both partners have their own income. In many cases, each spouse ends up managing their retirement accounts separately. Yet, various scenarios can affect this dynamic, such as one partner not working or one spouse having a more substantial savings plan. It is essential to consider the unique circumstances of your relationship and financial situation when planning for retirement.

A financial advisor can help you make a decision that suits both your future needs. This article will also explore some key considerations to help couples with their retirement planning so they can build a secure future together.

Does my husband/wife need a separate retirement account?

The answer to whether your spouse needs a separate retirement account is entirely personal and will depend on your specific financial situation and future needs. However, to find out if you need a separate account or not, you must first understand the basics of retirement planning for couples. Retirement accounts fall into two main categories – employer-sponsored accounts, like the 401(k), and personal retirement accounts, like the Individual Retirement Account (IRA). Here’s how these work for couples:

401(k) plans for couples

A 401(k) account is only available to working people if their employer offers it. Each spouse would need their own 401(k) if they both work and have access to one from their workplace. It is important to note that employer-sponsored 401(k) plans are set up in the employee’s name, and they belong solely to that individual. Only the employee and their employer are allowed to contribute to the account. So, even if the account belongs to your spouse, you will not be able to directly contribute to their 401(k) on their behalf. If one spouse does not work, they will not have a 401(k) account but can be named as the beneficiary for the working spouse’s account. This will ensure that they inherit the funds if something happens to the account holder. If both spouses have jobs and each has a 401(k), you can both save independently. This will offer both individuals tax advantages, and you may also receive employer contributions, which can help boost your savings.

A spouse is generally the default beneficiary of a 401(k) and automatically inherits the account upon the working partner’s death. To name someone other than a spouse as the beneficiary, the working spouse must get written consent from their partner, witnessed by a notary or the plan’s representative. Without this, any beneficiary other than the spouse is not valid, even if they are listed on the 401(k) account. This is especially important to keep in mind for couples who have adult children, friends, or other family members they might wish to list as beneficiaries.

IRAs and spousal IRAs for couples

Unlike a 401(k), IRAs are not tied to employment and are available to anyone who wants to save for retirement. However, as the name suggests, they can only be held in one individual’s name. So, each partner needs a separate account. However, there is a provision for a joint IRA account called the spousal IRA. This unique account allows a working spouse to contribute to a non-working spouse’s IRA. This special account enables both partners to save for retirement and benefit from tax-deferred growth. Depending on your preference and tax situation, you can have a spousal Roth IRA or a traditional one.

Here are some key points about spousal IRAs that you must know:

• A working spouse can contribute to an IRA on behalf of their non-working spouse, which is then held in the non-working spouse’s name. This way, both partners can continue to grow their retirement savings.
• Spousal IRAs allow married couples to maximize their retirement contributions even when one partner may not have much income.
• Couples must meet a couple of requirements to qualify for a spousal IRA. Firstly, you must file a joint income tax return for the financial year in which the spousal IRA is established. And secondly, you must have earned income or other eligible compensation that equals or exceeds the total contributions made to the IRA.
• Can the spouse contribute to a Roth IRA? Yes, couples using a spousal IRA can contribute up to the annual IRA contribution limit for each spouse, as long as they file a joint tax return on their IRA under married filing jointly and have earned income for the concerned year. This rule also allows a stay-at-home spouse to benefit from retirement savings without having employment income.
• Just like with a 401(k), a spouse can be designated as the beneficiary of an IRA to ensure that the account’s funds go to them upon the account holder’s passing. However, if the couple lives in a community property state, they may need their spouse’s written consent to name a different beneficiary. In community property states, all income earned during the marriage is regarded as jointly owned by both spouses, regardless of which spouse earned it. So, if a retirement account was funded with income earned during the marriage, both partners share ownership of the funds. In these cases, the working spouse must get written consent from their spouse if they want to name a different beneficiary. The community property states in the U.S. include California, Arizona, Louisiana, Idaho, New Mexico, Nevada, Texas, Alaska, Washington, and Wisconsin.

If you wish to use the Spousal IRA, you must understand the traditional and Roth IRA limits for married couples. The rules for Roth IRA contributions differ significantly depending on a couple’s tax filing status. Married couples who file jointly enjoy higher income thresholds, with full Roth IRA contributions allowed if their Modified Adjusted Gross Income (MAGI) is below $230,000. Each spouse can hold their own Roth IRA individually and contribute up to $7,000 annually, or $8,000 if they are 50 or older in 2024. This brings the total for the couple to $14,000 per year or $16,000 if both are over 50. For added flexibility, even a non-working spouse can contribute through a spousal IRA as long as the working spouse earns enough to cover both contributions.

On the other hand, married individuals filing separately have lower limit thresholds. If they lived with their spouse at any point in the year, they could only contribute if their MAGI is under $10,000, with contributions phased out entirely at $10,000 or more. This filing status imposes much lower income limits compared to those filing jointly, particularly for spouses who live together.

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Here’s a detailed table to help you understand the limits in 2024:

Should you have a separate retirement account for your spouse?

When it comes to a 401(k), you will need an individual account if you decide to participate in your employer’s plan. While employees are not required to contribute to their employer’s 401(k)s by law, some employers have automatic enrollment. So, you may be signed up to the plan when you join by default unless you decide to opt out. However, you can’t join your partner’s 401(k) account, and your savings must remain separate, or you may not save at all. One advantage of keeping your own 401(k) account is that you can potentially benefit from matching employer contributions on both accounts, which can significantly boost your joint retirement savings. Having individual 401(k) accounts gives you access to twin employer matches, where each spouse receives a matching contribution from their respective employers.

With IRAs, you can have multiple IRA accounts or stick to just one. It is entirely up to you. Unlike 401(k)s, IRAs do not typically offer employer matching, but they can be very beneficial for couples, especially when one partner is not working or earns very little. A spousal IRA allows couples to save together and ensures that both partners have equal ownership of the account. This not only boosts your household savings but also promotes financial independence among individuals.

Retirement planning considerations for couples

Irrespective of what you choose, here are some things you must keep in mind when planning for your retirement as a couple:

• Understand the laws governing beneficiary naming in the case of divorce: One of the first things to know when planning for your retirement as a couple is the laws surrounding beneficiary designations for retirement accounts like 401(k)s and IRAs. Generally, a spouse is considered the default beneficiary of a 401(k) or an IRA. However, things can get complicated in the case of a divorce. In the unfortunate event of a divorce, it is essential to update your beneficiary designations immediately. If your ex-spouse’s name remains on any retirement benefit forms, they could inherit those benefits, regardless of any divorce settlements or state laws that might suggest otherwise. The federal Employee Retirement Income Security Act (ERISA) mandates that plan administrators pay out benefits to the named beneficiary, which means if you have not updated your beneficiary designation post-divorce, your former spouse may receive all the funds left in the account. So, you must regularly review and update your retirement account beneficiaries in case of any changes in your personal life and marital status.
• Understand the pros and cons of joint vs. individual accounts: When it comes to retirement accounts, both joint and individual accounts come with their own sets of benefits and drawbacks. Joint accounts simplify the management of your finances. They allow couples to pool their resources and save more. For example, a spousal IRA enables a working spouse to contribute to the non-working spouse’s retirement account and help maximize retirement savings even when one partner is not earning any income. However, joint accounts can also pose challenges. If you and your partner do not have a strong relationship built on trust, having joint accounts may lead to complications and stress, especially in the event of a separation or divorce. Individual accounts, on the other hand, provide greater autonomy and flexibility. You can tailor your investment choices to your personal risk tolerance and retirement goals without needing to consult your partner for every decision. Individual accounts may be the better option if you have unique financial objectives or want to ensure a safety net in case of unforeseen circumstances, such as a divorce.
• Consult with a financial professional: Retirement planning as a couple can be complex, so consulting with a financial professional is highly recommended. Every couple’s situation is unique. It can be influenced by factors such as their individual incomes, expenses, debt levels, dependents, and retirement goals. A financial advisor can help you create a personalized retirement strategy that considers your specific needs. Furthermore, a professional can also help with other essential factors, such as tax diversification, investment strategies, and how to maximize your contributions across different account types.

To conclude

Whether you have a joint IRA, or an individual one, is a decision that ultimately rests with you and your partner. However, before making a choice, it is important to thoroughly understand the relevant laws, evaluate your unique needs as a couple, and consider your future together. You must also have an open and honest discussion about your financial goals. Additionally, consulting with a financial advisor can be helpful in deciding whether you should pool your resources and save together or maintain separate accounts that align with your individual financial goals.

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