Retirement Planning For Dual-Income Households

By 2012, the Bureau of Labor Statistics reported that six in 10 families with children have two working parents. What's more, the majority of Americans feel they need dual incomes in order to reach their financial goals.2 For a major goal like retirement, working couples need to be especially vigilant to coordinate their planning efforts in a way that supports their combined accumulation objectives. As you and your spouse execute your joint retirement strategy, keep some of the following tips in mind.

IRA Contributions and Deductibility

In 2015, you and your spouse can each contribute $5,500 to a traditional or a Roth individual retirement account (IRA), if you have sufficient taxable compensation (or earned income from self-employment).2 If you are age 50 or older, you can direct an additional $1,000 to your IRAs for a combined total of $13,000. Your eligibility to contribute to a Roth IRA is dependent on your filing status and modified adjusted gross income for the year. You also may be able to deduct all or a portion of your traditional IRA contributions if you satisfy Internal Revenue Service guidelines. For example, if you file a joint tax return, and neither spouse is covered by an employer-sponsored retirement plan, traditional IRA contributions are generally fully deductible up to the annual contribution limit.

If you both are covered by an employer-sponsored retirement plan, traditional IRA contributions will be fully deductible if your combined adjusted gross income (AGI) is $98,000 or less. The amount you can deduct begins to phase out if the combined AGI is between $98,000 and $118,000, and no deduction is allowed if it is equal to or exceeds $118,000.

Similarly, if one spouse is covered by an employer-sponsored retirement plan and the spouses file a joint federal income tax return, the spouse who is not covered by an employer-sponsored retirement plan may qualify for a full traditional IRA deduction if the combined AGI is $183,000 or less. Deductibility phases out for combined incomes of between $183,000 and $193,000, and is eliminated if your AGI on a joint return equals or exceeds $193,000. Note, however, Roth IRA contributions are not income tax deductible.

Coordinating Multiple Accounts

Like any investment portfolio, retirement accounts should work in unison to help you pursue a specific accumulation goal. However, with job changes so prevalent, it is likely that a couple may have multiple retirement accounts, including 401(k), 403(b), or 457 plans, rollover IRAs and possibly defined benefit plans. Because of the range of investment options offered under such plans, it is important to keep the big picture in mind in order to maintain a coordinated investment strategy. As you review your accounts, ask the following questions:

• Is your overall asset allocation in line with your objectives and risk tolerance?
• Are the portfolios adequately diversified? Are they overweighted (or underweighted) in any one asset class or individual security?
• Do the portfolios complement your other investments (e.g., taxable investment accounts, real estate and other assets)?
• Consider the fees associated with your retirement accounts and how they might affect returns. Would it make sense to consolidate some accounts to help minimize these costs?

Next week, we'll talk more about Retirement Planning for Dual Income Couples: Retirement Distributions and Social Security

Source:

1 Forbes, "4 Dual-Income Households Tell All: How We Save and Spend," November 4, 2013.

2 If an individual has more than one IRA, the limits apply to the total contributions made in the aggregate to all the Traditional and Roth IRAs an individual owns.

3 A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. A 10% penalty tax will apply on funds converted to a Roth IRA, if those funds are withdrawn before five years have elapsed unless the owner is age 59 ½ or another exception applies. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts andcircumstances.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

If you’d like to learn more, please contact Julia A. Peloso-Barnes , CFP®, CPM®, ADPA®, CPRC®

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

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