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Any reason to maintain level balance with my spouse's account?
Old 11-17-2010, 02:52 PM   #1
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Any reason to maintain level balance with my spouse's account?

My wife and I both work, and have Roth and Traditional 401ks and IRAs. However, I have more retirement savings than her because I have been working longer and make more. I am a year and a half older than her.

We aren't maxing out our contributions to all accounts. I am wondering if there is any reason to reduce my contributions and have her increase hers? We share joint finances in every way other than retirement accounts (since we can't).

I am assuming if we divorce, part of my retirement account could go to her, right, so that isn't of consideration? What about death, forced distributions, etc.. ?
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Old 11-17-2010, 02:59 PM   #2
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Assuming you live in a community property state....

Retirement accounts (401ks, IRAs 403bs etc)are all community property, it doesn't matter who pays into the accounts. So even though your name (or her name) is on the accounts, it all belongs to both of you.

Upon death, whomever you selected as the beneficiary gets the account. That is usually the spouse. If for some reason you selected a beneficiary other than the spouse, then the spouse may be able to claim their share as community property anyway.

Forced distribution for what ? 401ks are off limits to creditors. The only people who could force a distribution is the IRS should you get behind in your taxes or cheated on your taxes. If you mean a divorce distribution then yes that could happen in the settlement.

My suggestion is for you both to increase your contributions. If you can, max out those accounts, you won't regret it. 20 years from now you can either have some bulging retirement accounts and be thinking of early retirement and giving the man the boot. Or you can have a garage filled with hardly wanted crap that you wonder why you bought. You'll also wonder where the money went and why some other people are so lucky to retire early. The choice is yours

If you are feeling like you are sacrificing for retirement and the spouse is not, so why shouldn't you pay less.... Perhaps you could feel good/better in knowing that you are doing good for the family. Also if it makes you feel better, many couples (not me) struggle with the money issue(s) and the distribution of such in an equitable manner.
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Old 11-17-2010, 03:12 PM   #3
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Sorry, I meant mandatory withdrawals due to age... in other words, I am not sure if there is a significant negative or positive effect given that I will be allowed distribution earlier (and forced distribution earlier).

And, I am not sure that it is necessarily a given that I should max traditional account contributions given that I will not have access to that money, if I really am shooting for early retirement.

.. and no, I don't live in a community property state. Don't see why that would be assumed, given that there are only a handful..
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Old 11-17-2010, 03:24 PM   #4
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tranceFusion:

I don't know about non-community property states but suspect that, in effect the end results are similar.

The mandatory distributions for retirement accounts are indeed real. But they are only a distribution from tax-deferred to after tax status once you take the income tax haircut. They are certainly not a spending plan. There is no reason why you couldn't then invest the money again (after taxes are paid) after a forced distribution.

Some people like to have both tax-deferred money and after tax money to game the tax treatment and for tax diversification. Keep in mind that capital gain rates for after tax accounts may likely rise in the future. So the tax advantage that after tax buy-and-holders enjoyed may be less so in the future.

The potential advantage of tax-deferred accounts is that you put money into these accounts at your highest working marginal tax bracket. Then when you retire and are (possibly) in a lessor tax bracket, when you take money out the tax burden is potentially lessened. Good luck projecting tax brackets some decades forward though.
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Old 11-17-2010, 03:30 PM   #5
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I always had a lot more in my 401ks and IRA's than DW because she did not work for a while and then my salary was always much higher. We were fortunate enough to be able to max out both our 401k contributions and that is what I would recommend you do.

If you are limited as to what you can contribute then I would first ensure that you are making your company match, putting the rest into DW's 401k and IRA. That would just be my preference, no legal reason in our case. She also has life insurance on my life as she will lose half my pension should I die before her. I have her named as the primary beneficiary on my 401k and IRA's.

I believe forced distributions at 70.5 are on individual life expectancies so I will currently be forced to withdraw more than her unless I lower the amount in my accounts, which I plan to do.
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Old 11-17-2010, 05:22 PM   #6
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During accumulation phase, if you can max out his & hers, then by all means do so.

If you cannot, then I would suggest contributing to both to capture any employer match. If you can't capture the full match of both employers, then capture the better match.

After that, contribute to the one with the better funds (lower expense ratio, passively-managed, in the asset class(es) you want).

In the withdrawal phase, rollovers to IRAs can make fund choices the same with low expense ratio and passively managed. Then I guess it really doesn't matter which you withdraw first or last or evenly or not. But one thing to watch out for is that you usually get access to lower fees if you have a specific minimum amount invested, so try to have both rollovers above any cutoffs.
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Old 11-18-2010, 01:48 PM   #7
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Assuming you live in a community property state....

Retirement accounts (401ks, IRAs 403bs etc)are all community property, it doesn't matter who pays into the accounts. So even though your name (or her name) is on the accounts, it all belongs to both of you.
Based on my understanding, this is not correct. In the case of a divorce, I think a spouse is only entitled to share the contributions that were made to the retirement account during the marriage, and perhaps also the increase in value of pre-existing shares during the marriage. Essentially, the spouse is entitled to half of the increase in the retirement account during the marriage, not "all of it."
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Old 11-18-2010, 03:37 PM   #8
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I always had a lot more in my 401ks and IRA's than DW because she did not work for a while and then my salary was always much higher. We were fortunate enough to be able to max out both our 401k contributions and that is what I would recommend you do.

If you are limited as to what you can contribute then I would first ensure that you are making your company match, putting the rest into DW's 401k and IRA. That would just be my preference, no legal reason in our case. She also has life insurance on my life as she will lose half my pension should I die before her. I have her named as the primary beneficiary on my 401k and IRA's.
We both contribute more than enough to capture the match by our employers. However, we can't afford to max out both of our maximum 401k + IRA contributions annually. So I guess the question really is, what's the best plan for what to do with the excess (above the match).

I'd rather steer away from her employers 401k because they only offer a single "lifestyle fund" choice. Of course, doing so is going to continue to keep my 401k balance higher.

So, is there any reason, for either of us, that we should choose keeping equally funded accounts over putting the money somewhere that gives us more options?
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Old 11-18-2010, 03:51 PM   #9
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We both contribute more than enough to capture the match by our employers. However, we can't afford to max out both of our maximum 401k + IRA contributions annually. So I guess the question really is, what's the best plan for what to do with the excess (above the match).

I'd rather steer away from her employers 401k because they only offer a single "lifestyle fund" choice. Of course, doing so is going to continue to keep my 401k balance higher.

So, is there any reason, for either of us, that we should choose keeping equally funded accounts over putting the money somewhere that gives us more options?
I think that's a discussion you and your wife need to have. Ideally you are bith sure that you are going to be together "until death doth you part". In that case you need to look at the costs and choices in your 401(k)'s and possibly make a decision to contribute enough to get the employee match and then look elsewhere to put savings for retirement, which would I expect will be TIRA's to get the tax deferral benefits or Roth IRA's to get tax avoidance on all the growth on the contributions.

If it were I, and the IRA's were a better option then I would fund DW's first. It just would seem more equitable. We've been together over 36 years and I can't imagine divorce but still feel uncomfortable at having so much of our money in my name only. When we start drawing down from our IRA money I'll certainly be sure to draw down my IRA's first.
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Old 11-18-2010, 03:57 PM   #10
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If it were I, and the IRA's were a better option then I would fund DW's first. It just would seem more equitable. We've been together over 36 years and I can't imagine divorce but still feel uncomfortable at having so much of our money in my name only. When we start drawing down from our IRA money I'll certainly be sure to draw down my IRA's first.
But what is it that makes you uncomfortable? If you die, she gets the money, and if you divorce, the money is going to get split up anyway, right? I'm just trying to make sure I am not missing something here.
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Old 11-18-2010, 04:08 PM   #11
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But what is it that makes you uncomfortable? If you die, she gets the money, and if you divorce, the money is going to get split up anyway, right? I'm just trying to make sure I am not missing something here.
We are in a community property State, plus we got married in college so both came into matrimony with nothing so everything will be split down the middle on death or divorce. It is irrational for me to feel wrong that the large majority of the IRA and 401k money is in my name. DW certainly doesn't seem to have a problem with the situation. I guess I'm just an old fuddy duddy.
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Old 11-19-2010, 08:17 AM   #12
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We are in a community property State, plus we got married in college so both came into matrimony with nothing so everything will be split down the middle on death or divorce. It is irrational for me to feel wrong that the large majority of the IRA and 401k money is in my name. DW certainly doesn't seem to have a problem with the situation. I guess I'm just an old fuddy duddy.

Oh haha, I see. Well, it would be alot easier if joint retirement was permitted. We both make sacrifices that benefit the other.. it is a shame for it to feel like those sacrifices are in direct conflict with maximizing one's retirement.
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Old 11-19-2010, 11:35 AM   #13
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Based on my understanding, this is not correct. In the case of a divorce, I think a spouse is only entitled to share the contributions that were made to the retirement account during the marriage, and perhaps also the increase in value of pre-existing shares during the marriage. Essentially, the spouse is entitled to half of the increase in the retirement account during the marriage, not "all of it."
This is my understanding also, and we have no plans to test it. As others have pointed out, it only really matters if you had assets before you got married.
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Old 11-19-2010, 12:27 PM   #14
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It may indeed be better to contribute more, or even all (except to get company match for you and assuming she is below contribution limits) to your wife's traditional 401k. That delays and reduces the mandatory withdrawals.

You can also just begin making withdrawals from your account first, drain it to zero, and then start on your wife's 401k. That may be enough to minimize the bad effects of your higher RMD.

I don't have the choice in contributions, but I will be draining my IRA first since I have 5 years on my wife. That should keep RMD's below what we want to take for income anyway, and leave us in the lower tax bracket if we fill in with the Roth's.
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Old 11-19-2010, 01:52 PM   #15
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Being single I don't know the answer, but I would figure out what happens when one of you dies, and then the 2nd one dies. If the first just stays in a 401K or can transfer to the other's, there's probably no diff. But if something else happens, it seems like you'd want them pretty even so that your heirs aren't dealing with whatever happens if they inherit a larger or smaller one. Hope that makes some sense.

I don't see RMD being a factor if you are real close in age. If there's a difference, putting more in the younger one's account would delay RMD. Same age? Then I don't see how it matters how the money is split. I think if you do the math the combined RMD will be the same, if I understand correctly that RMD is a flat % with your life expectancy being the factor.

For example, say you have $1M between the two of you, and you have to pull 5%.

If acct A has 900K and B has 100K, you are pulling 18K and 2K = 20K total

If each account has 500K, you are pulling 10K from each, = 20K total

So, no difference.

If all things are equal, I'd max out the company match than max the one with better investment choices and/or lower expenses.
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Old 11-19-2010, 01:55 PM   #16
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I just read the original post, 1.5 yrs difference. So you can delay the RMD a year or two for her. Is that enough to overcome the limited investment choices in her plan?
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Old 11-19-2010, 02:16 PM   #17
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Being single I don't know the answer, but I would figure out what happens when one of you dies, and then the 2nd one dies. If the first just stays in a 401K or can transfer to the other's, there's probably no diff. But if something else happens, it seems like you'd want them pretty even so that your heirs aren't dealing with whatever happens if they inherit a larger or smaller one. Hope that makes some sense.
Ed Slott covers this quite well in The Retirement Savings Time Bomb -- And How to Defuse It ...
It's full of stuff that matters a lot that most of us don't think about very much.
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Old 11-19-2010, 03:18 PM   #18
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If you are concerned about divorce, don't worry. Her lawyer will make sure she gets half, in a heartbeat. Google "QDRO".
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Old 11-19-2010, 03:58 PM   #19
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DW did not understand much about finance when we married and when I set up our Roths I put the same amount in the SAME fund since our relationship was more important that anything and as she asked."if its good enough (the fund) why isn't it good enough for me?" Now she understands more about various types of investments but stillI keep things uncomplicated for her, her IRA is VG Wellesley/Star funds, nothing much to manage. We have two sons and we expect to pass on our Roths so we plan to build them up to equal amounts and spend the rest of our assets, if anything is left that is divided in two. The point of al this is to have a financial plan that works for the wife, better to be happily married than the alternative.
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