By: Eva Sadej
Whenever you read financial advice that purports to calculate how much you should contribute to your retirement plans, how much you should save for your children’s education, and so on, the focus has been on you as a single person. But people have been buddying up to handle living expenses and major financial milestones for thousands of years, in the amazing, mutually beneficial contract called marriage.
In our article Nest Egg For Two: How to Save for Yourself and a Non-Working Spouse, we discuss the financial benefits of marriage: “Fortunately, building a nest egg for two people is not the same as building two nest eggs. If you and your spouse live in reasonable harmony under one roof, raise children together, and have mutualistic goals (the desire to travel together, the desire to buy things for the whole family to enjoy, and so on), there are numerous financial synergies that come into play.” Not only are there cost synergies and mental health benefits (statistically) to being married, there are also specific, quantifiable ways that married people win over single people.
Miracle of Compounding Doubles
If your family is (or will be) sustaining itself on two incomes, then the miracle of compounding works for you both in saving for retirement. That same modest $300 a month into a 6% corporate bond since you are 22 can add up to $1.4 million if there are two people contributing, rather than “merely” $715,000 if you contribute alone. A comfortable retirement gets just that much easier with when there are two people contributing rather than just one. Not only are there obvious income benefits to potentially having two working professionals contributing to the expense budget, but there are also laws that benefit couples in retirement planning and somewhat reduce the burden of the marriage tax, whether your spouse is working or not.
IRA Contribution Limits Double
The maximum contribution limit for people under the age of 50 in 2010 is $5,000 per year ($6,000 for people over the age 50). However, if your spouse does not work, you can open a Spousal IRA in your spouse’s name contribute a dual amount to your retirement savings. Your couple’s tax-deferred contribution limit per year becomes $10,000 if you are both under age 50, $11,000 if one of you is over age 50, and $12,000 if you are both over age 50. With the contribution limit as a key disadvantage of the IRA (causing people to put more money in 401(k) plans with higher fees and less choices), having a spouse allows one to put more money in a preferred investment vehicle.
529 Plan Contribution Gift-Tax Free Limits Double
There is no annual contribution limit on 529 college savings plans, granted the total account balance per beneficiary does not surpass the neighborhood of $350,000 (the maximum account balance varies by state). However, any annual contribution amount over $13,000 to a 529 college savings plan is subject to gift tax for a single parent. But if you are a married, this gift-tax free limit doubles to $26,000 per year, allowing you to contribute more to this tax-advantaged account for your children’s education.
1.5x-2x Social Security Benefits
In the previously mentioned article Nest Egg For Two: Saving For Yourself and a Non-Working Spouse, we write the following: “Individuals who have worked for less than 10 years are not eligible to receive full benefits unless they are disabled or widowed. However, a non-working spouse can independently collect 50% of what the working spouse receives without having paid into the system, once the working spouse files. That means if you collect $1,000 a month in Social Security, your spouse can independently collect $500 for a total of $1,500. Yes, your non-working spouse can spontaneously begin generating income once he or she reaches retirement. Spouses without independent Social Security benefits can even continue to collect 50% after a working spouse has died.”
This means that when calculating your total Social Security benefits, you should consider your spouse’s benefits too, whether or not he or she is working.
Estate Tax Exemption Doubles
The amount an individual can leave to heirs free of estate taxes was $3.5 million dollars in 2009, and any amount beyond this limit is taxed 45%. In 2010, there is no estate tax liability. In 2011 and beyond, it’s unclear what the threshold will be, but for the purposes of this article, we’ll assume the 2009 limit is reintroduced. If you are married, and half you assets are in your spouse’s name, you and your spouse can pass on a total of $7 million dollars to your beneficiaries free from estate taxes.
Additional limits that double are the annual ($13,000 per beneficiary) gift tax and lifetime gift tax ($1 million per beneficiary). And if you have 3 children and 8 grandchildren by the time you die, this limit shouldn’t really be a problem if you’ve been clever and spread these gifts out over the years.
A note on the marriage tax: The marriage tax penalty was implemented in the federal tax code in 1969 when Congress sought to help single-income families. It was never intended to hurt. For example, a single income family with one parent making $200,000 would be in the 33% federal tax bracket before 1969, but in the 28% tax bracket after 1969. With the American demographic having shifted to 57% dual income families , the laws intentions have backfired. We hope that the four benefits listed above and the nebulous synergies and emotional benefits will help you view your marriage as more of a financial opportunity than merely a tax burden.