I’ve mentioned before that I seem to attend a wedding every few months these days. I got to thinking a bit about how finances change when you say “I do.” Of course there’s the everyday issues of who manages the money, and whether to have separate accounts.
But there are bigger picture items to consider too – things like retirement planning for a couple instead of two singles, and tax optimization for people “married filing jointly” rather than “single.” Marriage is a beautiful beginning of a life together…and also a time to review your overall financial picture.
7 Things to Review When You Say I Do
- Retirement account eligibility: If you and your new spouse make over $179,000 combined, you cannot contribute to a Roth IRA. Get around this by contributing to a traditional IRA instead, then converting to a Roth IRA.
- Retirement savings strategy: Now that you have two people in your household, your expected expenses in retirement will likely change.You also have two incomes to use for saving, and, with any luck, two workplace retirement plans to take advantage of. If you are planning to put less than the maximum away in your 401ks, consider weighting the contributions in favor of the spouse who has the better plan (i.e., better company match and/or more investment options). For instance – if you will contribute $20,000 total and you get a 50% match on all contributions but your spouse gets a match on only the first 2%, max out your 401(k) and contribute the remaining $3,500 (in 2011) to your spouse’s 401(k). If you’re not totally combining your finances, you’ll have to work out the finer details of how to split other bills, but attacking retirement savings this way will still help you amass more money together in the long run. To protect yourselves in case of a divorce, you might want to consider having a lawyer draw up an agreement helping you split both partners’ accounts in a fair manner if you are contributing unevenly.
- Tax implications: You probably want to change your withholdings when you get married so that you are sending the right amount of money to the IRS and keeping the right amount for yourself and new spouse. If one of you has significant non-paycheck income (or deductible expenses), the tax burden will be drastically different than what the other spouse is used to. Play around with a tax calculator to estimate your tax burden for the upcoming year – and remember that whether you get married on January 1 or December 31, the IRS considers you married for the entire calendar year and taxes you accordingly.
- Student loan interest deductions: You can deduct all or some of the interest paid on student loans IF your income is less than $75,000. Once you get married, you can only deduct interest if your combined income is less than $150,000. So if you’ve been favoring other debt repayment over student loans because of the interest deduction, make sure that deduction still exists – or rethink your strategy.
- Insurance: When you’re single, you probably don’t need much in the way of life insurance, especially if you are debt-free. But once you’re married, you and your spouse will probably grow to be dependent on both salaries almost immediately. So make sure each spouse has enough life insurance to replace his or her income for at least 10 years – more if you have children or large amounts of debt. And while you’re at it, make sure each of you has adequate disability insurance too!
- Debt repayments: If you each have debt, you might be attacking it individually in a logical order that makes sense for you. But if you combine your finances completely after marriage, you might want to change up your debt repayment strategy – if you have student loan and balance transfer debt at 6% or less, and your spouse has high-interest credit card debt at 18%, you should tackle all of the higher interest debt before sending anything but minimum payments to your own.
- Beneficiaries: I’ve said it before, but I will keep repeating it until I am sure everyone gets it: named beneficiaries on financial accounts supersede any written wills. So congrats on remembering to write wills that name the other spouse as your sole beneficiary – but if your 401(k), life insurance policy or anything else lists your parents, niece, best friend or Joe Schmoe as the beneficiary, your spouse will not be able to claim any of that money. If you and your spouse agree that you will not be each other’s main beneficiaries, that’s fine (although some states may require the disinherited spouse to sign an acknowledgement). But if you think your spouse will inherit all your assets in the case of your untimely death, make sure you take the steps to make that belief true.