Being married has its benefits financially, assuming you, your partner or both aren’t too much of the big-spender types. These benefits come from several areas which we will review some of here.
Our learning goals for this post are:
- To understand why marriage creates some financial benefits, and even more importantly, to understand why those benefits may disappear when a divorce or death of a spouse occurs
- To know how to take maximum advantage of marital financial benefits
- Think about life’s eventual realities and how they will impact the surviving spouse’s finances
Let’s first discuss taxes. Our “progressive” tax system can cut both ways. A dual income, high earning couple may actually be hurt by filing a joint tax return as the combined income may be assessed at a higher marginal tax bracket. But for couples where only one spouse works or earns the majority of the income, the larger level of personal exemptions could reduce the total tax paid compared to filing two individual returns. The current tax rules also put joint tax return filers to be in a lower tax bracket at a particular household income level, offering some additional tax savings.
Married couples often have children and there are tax breaks for families that file a joint tax return. I don’t like to focus too much on this benefit because as a father of a 21-year-old daughter, the outlay of expenses for a child’s care and education usually exceeds the tax benefits for most except lower income families.
In this section we’re concerned primarily with traditional and Roth IRAs. For those who participate in employer-sponsored retirement plans, deductions for contributions to traditional IRAs are limited based on the levels of household income. Currently, in 2021, the income limitations for a full deduction for those earning under $65,000 for individuals or $104,000 for joint filers. There is a phaseout range where the deduction is reduced between the aforementioned income levels and $75,000 (single) and $124,000 (joint). Above these levels there is no deduction for your traditional IRA contribution if you participate in an employer-sponsored retirement plan. Keep in mind if you or your spouse do not participate in an employer plan, your traditional IRA contributions are fully tax deductible no matter what level of income you have.
Roth IRAs don’t offer a tax deduction for contributions but do allow for tax-free withdrawals in retirement. The ability to contribute to a Roth IRA is limited at certain levels of household income in a manner similar to the traditional IRA deduction phase-out rules. In 2021, those levels are $125,000 for single filers and $198,000 for joint filers. There is a phase-out range where your maximum contribution is reduced and finally eliminated. Those ranges are from the aforementioned levels up to $140,000 for single and $208,000 for joint.
Annual IRA contribution limits are currently $6,000 per person for those under age 50 and $7,000 for those over 50 years of age. Those filing joint tax returns are able to contribute to an IRA even for a non-working spouse, doubling the amount that can be contributed.
If one spouse has access to employer sponsored health insurance, they can add their spouse to the plan. Often, the rates for group plans are lower than comparable individual insurance, even if the employer doesn’t contribute for the family coverage.
Of course, once you reach age 65 you become eligible for Medicare so this marital savings benefit applies to pre-retirement years.
Being married is perceived as a sign of stability and this often translates into lower auto insurance rates compared to two individuals purchasing coverage on their own.
Based on age differences between spouses and benefit level differences, married couples can get creative in filing for Social Security benefits. The spouse with the lower benefit may want to file for benefits first allowing the larger benefit to grow with “delayed retirement credits”. This can benefit whichever of the spouses ends up being the survivor. Keep in mind an individual can only collect one Social Security benefit and surviving spouses receive the higher of the two benefits.
Social Security benefits are one of the things that will change when the first spouse dies. There will be a drop in household income due to the loss of the lower benefit. When planning for income in retirement it is a good idea to review scenarios that will impact the household income and plan for these contingencies. Social security planning is an important part of the process.
No one specifically gets married for financial benefits, but many married couples do receive some advantages. If you would like to learn more on how marriage can change your financial plan, Click Here to contact us today.