As seen in the Sunday Journal – May 25, 2014
Getting Married Has Its Financial Benefits
For One Thing, It Allows You to Pool Risk
By Jonathan Clements
Forget the marriage penalty. If getting hitched has any financial effect, it’s likely to be a bonus.
In the 1990s, there was much discussion about how the tax code penalized married couples. But many of the issues were addressed in the 2001 tax law. Imagine a single woman who makes $84,500 and takes the standard deduction. Her federal income-tax bill in 2014 would be $14,444, assuming the entire sum was taxed as ordinary income. What if she got married? If her new spouse had the same $84,500 income, their combined $169,000 income would be taxed no more heavily than if they remained single.
Yes, once a married couple’s combined income exceeds $169,150, they may pay more in taxes than if they were single. There can also be a marriage penalty at lower income levels. Getting married might, say, reduce eligibility for Medicaid benefits, the earned-income tax credit or the tax credit that can help pay for health insurance under the Affordable Care Act.
Still, for many couples, getting married will turn out to be a financial windfall. It’s cheaper for two people to live together than live apart. Getting married also allows you to pool risk. For instance, if you lose your job but your spouse is still working, it will likely be easier to cope financially than if you were single. In addition, getting married can help with state and federal estate taxes.
There are two other intriguing financial benefits that come with getting married, which Pittsburgh accountant and attorney James Lange highlights in his new book “Retire Secure! For Same-Sex Couples.” The advantages are equally relevant to opposite-sex couples who marry.
Social Security. Getting married can be a financial bonanza when claiming Social Security benefits, especially if one spouse has significantly lower lifetime earnings than the other. The lower-earning spouse can claim spousal benefits based on the other spouse’s earnings record. Those spousal benefits can be worth as much as 50% of the main breadwinner’s benefit as of his or her full Social Security retirement age, which will be 66 or 67, depending on the year born.
In addition, if the higher-earning spouse dies first, his or her benefit will be payable to the lower-earning spouse as a survivor benefit. This is why it often makes sense for the higher-earning spouse to delay claiming Social Security, possibly until as late as 70, to get a larger monthly benefit.
“One of the best strategies is to apply and suspend,” Mr. Lange says. What’s that? At his or her full Social Security retirement age, the higher-earning spouse applies for benefits and immediately suspends. That allows the lower-earning spouse to claim spousal benefits. The higher-earning spouse then delays benefits to age 70.
Individual retirement accounts. If you inherit a traditional or Roth IRA, often the smart strategy is to make use of the so-called stretch IRA. That involves withdrawing only the minimum sum required by the Internal Revenue Service each year, so you squeeze maximum benefit from the traditional IRA’s tax-deferred growth and from the Roth’s tax-free growth.
But here again, spouses have an advantage over other beneficiaries. If you leave your IRA to someone other than your spouse, the beneficiary has to start drawing down the account beginning the year after your death, and the minimum withdrawal is based on the IRS’s single-life expectancy table.
But if your husband inherits your IRA, he can treat the IRA as his own. That means required minimum distributions can be delayed until age 70½ and then the account is drawn down using the uniform-lifetime table, which involves smaller distributions than those based on the single-life table. Moreover, if it’s a Roth IRA, your spouse wouldn’t have to take any distributions during his or her lifetime.
The benefits even continue with the next beneficiary—the person who inherits your IRA from your spouse. Indeed, if the next beneficiary inherited your IRA from someone who wasn’t your spouse, the required annual withdrawals would likely be far larger.
Mr. Lange notes that Congress might repeal the stretch-IRA strategy and instead force beneficiaries to empty the account within five years. “The assumption is that would only impact nonspousal beneficiaries,” he says.
Is a married couple’s ability to squeeze more tax-sheltered growth out of an IRA, coupled with Social Security benefits, really that crucial?
Mr. Lange thinks so. “These two advantages can make the difference between running out of money in retirement and being financially secure,” he argues.
