Why Couples Need to Manage Retirement Accounts as a Team
How to minimize fees and taxes, maximize ultimate savings
The intricacies of a spouse or partner’s workplace retirement plan will never rank as scintillating pillow talk, but the topic can prove profitable. Couples who coordinate their strategy by playing to each plan’s strengths and avoiding weaknesses are going to land in retirement with more money saved up.
Yet a recent survey of more than 5,000 workers by the Transamerica Center for Retirement Studies finds just one in three are “very familiar” with the retirement plan of their spouse or partner. Another one in three went with “somewhat familiar” but that sure reeks of wanting to save face, right? Either you know it well, or you don’t. Kudos to the final third who were honest enough to cop to not being familiar.
Here’s how to get up to speed on each other’s plan, so you can retire with more money (and more tax flexibility).
Whose plan is the cheapskate? (That’s a compliment.) If you both work for a large corporation or public entity, chances are your plans offer low cost mutual funds or collective investment trusts (CITs). The average weighted annual expense ratio for mutual funds is 0.45% according to Morningstar. Many index mutual funds and exchange traded funds charge less than half as much. But smaller plans often have higher-cost funds. Over many decades, paying higher fees can mean landing in retirement with tens of thousands of dollars less than if you saved in low-cost funds.
This is where coordinating can pay off. The maximum contribution to a 401(k) this year is $19,500 if you’re younger than 50, and $26,000 if you’re at least 50. If that’s more than what you both — combined — plan to save this year, then consider doing most of the saving in the plan with the lower costs. Most, but not all. If an employer offers a matching contribution, you want to make sure you contribute enough to get the maximum match, even if the investing options are expensive.
If your goal is to save more than the $19,500/$26,000 per-person 401(k) limit, you might also consider if it makes sense for the person with the weaker (higher fee) plan to focus on funding an IRA, after contributing enough to the 401(k) to get the match. Discount brokerages make it easy to build an IRA with funds and ETFs with annual expense ratios below 0.20%. In 2020, the IRA limit is $6,000 if you’re younger than 50, and $7,000 if you’re at least 50.
Are we both contributing enough to get the maximum match? If either of you has job-hopped in the past few years, you may have been automatically enrolled in the retirement plan. That can be a trap, as many plans set the default contribution rate for new employees so it auto-enrolls at a percentage that is not enough to qualify for the maximum matching contribution. You never want to turn down what is effectively an annual bonus. Ping HR and ask that your contribution rate be raised to a level that qualifies you for the maximum employer match.
Do we have any old stragglers sitting in expensive plans? Once you leave a job — voluntarily or not — you have the option of moving the account into an IRA, in what is called a 401(k) rollover. You might also have the option of moving money from an old employer’s plan into your current employer’s plan. The bottom line is that if you can lower the annual expense ratios you pay by moving, it’s worth considering a rollover.
Should we take advantage of the Roth option in at least one of our plans? Most workplace retirement plans now offer the option of contributing to a Roth 401(k) account, rather than the traditional 401(k) account. The big diff is that with a Roth you get no upfront tax break on what you contribute this year; with a traditional, your contributions are made pre-tax, effectively reducing your taxable income this year.
The Roth payoff is in retirement: no taxes whatsoever on withdrawals. Money you pull out of a traditional will be taxed as ordinary income. This is worth a huddle with a financial advisor/tax pro, but just as a scene-setter: Lots of retirement experts suggest having money in both types of accounts. Come retirement, having the flexibility to take out some money without owing tax (the Roth money) can help you manage your tax bill.
What’s our overall allocation plan? Your individual retirement plans need not each be strategically beautiful pie charts with an age/risk appropriate mix of stocks, bonds and cash. All that matters is that your combined allocation — across these plans, and any other retirement accounts, such as IRAs — makes sense given your overall retirement investment strategy.
Again, this is where you can play to a given plan’s strengths. Maybe one plan has a great international stock fund, and the other’s is high cost. In that case, do all your international investing in the low-cost fund and ignore it in the plan that offers a costlier option. Does one of you have a stable value fund that currently pays out more than the other plan’s cash option? Same notion here: What money you collectively want to keep in cash can be done solely in the higher yielding stable value fund.