Nest Egg for Two: Saving For Yourself And A Non-Working Spouse (Content for Financial Advisors)

Use this article as a basis to explain the information to your clients. Feel free to copy and edit as you see fit.

It seems as if there’s no discussion any more: children or no children, both parents work. But a recent demographic trend in the United States shows that quite the opposite is happening. Stay at home moms are on the rise, with the number of women participating in the workforce declining across all income groups, with similar patterns for families with higher net worths and families below the poverty line alike. [1] This “opt-out revolution” not only has seen moms staying home, but fathers too: a 2005 study by the Census Bureau found an estimated 159,000 stay at home dads in the Unites States, a number steadily rising from 98,000 in 2003. That’s a 61% increase in just 2 years! [2]

That 2005 study found an estimated 5.6 million stay at home moms in the United States, a 22% increase from 1994. [3] This is entirely out of the ordinary, with women’ labor participation rates having climbed consistently in the previous four decades: from 40.8% in 1970 to 57.5% in 2000. In 2009, about one-third of moms at home had family incomes of $75,000 a year or more, whereas roughly half of other mothers did.

What to do with these statistics? Has child rearing become more demanding or has America’s labor-leisure tradeoff taken a nose-dive? Whatever the reason, we believe that a number of families are in the situation of planning retirement for two people using income from only one.

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. If you have been able to support yourself and your family on just one income, building a nest egg of the recommended 80% preretirement income should for all reasons satisfy your and your spouse.


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The Marriage Penalty May Actually Work In Your Favor

As mentioned in Why Married People Are Financially Happier, “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 law’s intentions have backfired.”

If you are in that remaining 43%, having a non-working spouse allows you to keep more of your tax dollars.
What if your non-working spouse would like independent income at retirement?

Thanks to the Tax Relief Act of 1997, non-working spouses are able to have their own, separate retirement accounts. Below, we not only explain the income sources your non-working spouse can pull from, but also encourage you to take advantage of the possibilities.

Spousal IRA. A non-working spouse can make a deductible IRA contribution just like a working spouse can. The yearly contribution limit is $5,000, or $6,000 if the spouse is 50 years or older. That means that if you are a working spouse, you can contribute $5,000 to your non-working spouse’s IRA, for a total contribution of $10,000 a year ($12,000 if you’re over 50). As the key drawback of an IRA are the contribution limits, the fact that you can contribute to two IRAs, one in your name and one in the name of your spouse, doubles your contribution limit. And as long as you and your spouse qualify individually for each, you can have a Traditional IRA for yourself and a Roth IRA for your spouse, as well as any combination thereof.

Social Security. Individuals who have worked for less than ten 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. [4] 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.

There are, however, some minimal restrictions. If you start collecting Social Security benefits at age 62, not only will you Social Security benefits by reduced by 25%, but your spouse’s benefits will be reduced by 50%. And even if your non-working spouse is older than you are, he or she cannot begin collecting Social Security until you do. If your spouse is younger than you are, even if you have begun collecting Social Security benefits, she cannot do so until she reaches retirement age (with an exception in the case that she is caring for a child less than 16 years of age).

A note on self-employed spouses: If your spouse is not unemployed but instead self-employed (perhaps he or she runs a home-based daycare center, and we are assuming it is not off the books) he or she will be forced to pay 15% income in Social Security Tax, and would thus be able to collect Social Security independently. [4, again] A self-employed spouse also open a Keogh or SEP IRA plan and/or a Solo 410(k) and contribute on his or her own behalf.

What if you divorce?

With the divorce rate of couples over age 65 steadily rising [5], you need to consider what will happen to your retirement assets in case you get a divorce. Retirement savings are one of the largest assets people own, oftentimes the second largest asset after the house (be wary, though, of considering your primary residence as an asset for retirement: Your House in An Asset, Not an Expense). In divorce or separation, a non-working spouse is entitled to be supported by a working spouse, both presently and at retirement. All retirement assets are considered marital assets and are subject to division depending on specific circumstances.

In a divorce, assets will be distributed equitably, but this does not mean 50/50. The sharing of these assets will be battled out by your lawyers. Most IRAs designate your spouse as a co-beneficiary of your plan. (Your spouse may withdraw early and rollover his or her share of the plan’s assets into his or her own IRA, but will be subject to a 10% federal tax penalty). After a percentage split of the retirement assets is agreed upon, you and your spouse must sign a Qualified Domestic Relations Order (QDRO). The QDRO establishes the soon-to-be-ex spouse’s legal right to receive a designated percentage of a qualified plan account balance or benefit payments and must copies of this document must be sent to the plan administrator to begin the process.

If you or your spouse do not sign a QDRO (there is no requirement that both sign, just one) and a percentage of your retirement assets goes to your ex-spouse, the amount will be treated as a taxable distribution to you. The income going to your ex-spouse will show up on your tax bill and you, not your spouse, will be subject to the 10% federal tax penalty for early withdrawal.

What happens in the case of your death?

If you are married, federal law says your spouse is automatically the beneficiary of your IRA or 401k or pension plan (via the spousal benefit, if available) – unless you specifically choose otherwise. Your spouse may request a lump sum distribution to close the plan (most common, and some plans require this to reduce administrative costs of managing plans for deceased employees), rollover the amount of the 401(k) or IRA into his or her own plan, or keep the plan and request to receive periodic payments. A decision must be made by the beneficiary by December 31 or the year following year of death of the plan participant.

However, even in the case of your death, your spouse does not get this money tax-free. He or she must pay both federal income taxes and estate taxes on the amount (if you are lucky enough to be in a bracket high enough to be subject to the estate tax). If you fear that your assets’ values will hit the threshold for estate tax, it is advisable that you open a separate spousal IRA under your non-working spouse’s name.