Spousal Income Differential

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Topic Author
kt_belle
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Joined: Mon Jan 24, 2022 11:06 pm

Spousal Income Differential

Post by kt_belle »

Spouse and I struggle to have a shared financial plan or vision. Our HHI is approximately $250,000. I earn roughly $225k through corporate employment and spouse earns $25k via self-employment. The income differential makes planning a challenge. What financial and tax strategies should we be using to optimize this situation? I have not seen much written on the topic of spousal income differential and financial optimization.
crre
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Re: Spousal Income Differential

Post by crre »

what exactly is your question? you seem to have two different issues.

one, "Spouse and I struggle to have a shared financial plan or vision". this has nothing to do with the income differential.

two, "The income differential makes planning a challenge". i am not sure what about the income differential makes planning more of a challenge than if there was no differential. please explain.
VGisforme
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Re: Spousal Income Differential

Post by VGisforme »

What exactly is challenging? I’m not sure what you are getting at here. Does she not share your financial goals? Income disparity has no real bearing on that.

I need some concrete examples of your challenges. What would be different if you both made $125k?
stungerz
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Re: Spousal Income Differential

Post by stungerz »

There are a lot of relationships where one of the partner makes big bucks and the other stays at home with the kids and technically makes no money.
stungerz
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Re: Spousal Income Differential

Post by stungerz »

There are a lot of relationships where one of the partner makes big bucks and the other stays at home with the kids and technically makes no money.

As long as you all are aligned, income differential shouldn’t come into play.
tibbitts
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Re: Spousal Income Differential

Post by tibbitts »

I don't think anybody finds this an unusual or challenging situation, which accounts for there not being much written about it.
Topic Author
kt_belle
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Re: Spousal Income Differential

Post by kt_belle »

I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
Topic Author
kt_belle
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Re: Spousal Income Differential

Post by kt_belle »

*I should add we married later in life and keep separate accounts just due to long-standing financial independence.
Jacotus
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Re: Spousal Income Differential

Post by Jacotus »

kt_belle wrote: Tue Jan 25, 2022 1:12 am I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
A solo 401k could be quite beneficial if used by the lower earner. The marginal tax rate is what is important for analysis, not the average rate. It looks like for Married Filing Jointly, you're in the 24% federal bracket, plus whatever the state income tax is. The tax deferral from 401k should be used and not just given up.

Do you and your spouse contribute to Roth IRAs (possibly using the Backdoor Roth IRA process)?
dboeger1
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Re: Spousal Income Differential

Post by dboeger1 »

kt_belle wrote: Tue Jan 25, 2022 1:14 am *I should add we married later in life and keep separate accounts just due to long-standing financial independence.
It sounds like this was the key missing piece of information. It's very difficult to optimize taxes when filing jointly but otherwise managing finances separately. A lot of tax optimization works at the total portfolio level, like maximizing the lower-earning spouse's retirement contributions while allowing them to use the other person's income for expenses.

I've never been a believer in keeping separate finances in a marriage myself, but then again, I'm young and have never had the experience of marrying late in life to somebody financially independent, so I suppose I could understand it. I'm curious, why not just file taxes separately then if the goal is to maintain separate finances? If the answer is either to pay lower taxes or because the lower-earning spouse is allowed to spend the higher-earning spouse's income, then I would argue you're not really all that separate anyway, so you may as well just get over the whole separation thing and manage the portfolio as a whole. If it makes your spouse feel better, let them keep separate cash reserves in case of a separation or something, but perhaps pitch the idea of aggregating future income in a joint account as a way of managing the household finances holistically. Especially with such a large difference in income, I just don't see the whole yours vs. mine thing being very healthy or sustainable, and I don't think combining future income necessarily has to come at the expense of keeping the separate balances you have now.

Edit: Forgot to add that "no shared financial vision" is often code for the higher-earning spouse disapproving of the lower-earning spouse's spending habits. I'm not saying that's necessarily the case in your marriage, but if it is, that's really something worth discussing with your spouse. It's often the case that both sides have valid reasons for feeling wronged; the higher earner feels their work is taken for granted, while the lower earner feels stripped of power despite doing most of the domestic work. There's really no way around this other than to talk about it and get on the same page. Lucky for me, my wife was on board with aggressive saving to achieve FIRE from the get-go, but there were also times we disagreed on things. The most obvious example was when to buy a house. I was very hesitant to take on a huge amount of debt and tie ourselves to a location, but she wanted the stability of a home and to get ahead of rapid housing appreciation in the area. Eventually, the right timing just made itself apparent when interest rates plummeted and we were talking about starting to have children, but we might not have pulled the trigger so suddenly had we not talked about our shared motivations.
Topic Author
kt_belle
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Re: Spousal Income Differential

Post by kt_belle »

Believe our marginal tax rate is 24%. Our total taxable income was $186k last year. I think this puts us above limit for a Roth. We don't do Backdoor Roth savings. Should we be?
mortalsonofmortal
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Re: Spousal Income Differential

Post by mortalsonofmortal »

For simplicity purpose, we take the total household income and use that to pay bills and invest the rest. There were times when one of us was making more than the other and vice versa. As we are both cool with this approach, it makes life easier.
vested1
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Re: Spousal Income Differential

Post by vested1 »

dboeger1 wrote: Tue Jan 25, 2022 1:51 am
kt_belle wrote: Tue Jan 25, 2022 1:14 am *I should add we married later in life and keep separate accounts just due to long-standing financial independence.
It sounds like this was the key missing piece of information. It's very difficult to optimize taxes when filing jointly but otherwise managing finances separately. A lot of tax optimization works at the total portfolio level, like maximizing the lower-earning spouse's retirement contributions while allowing them to use the other person's income for expenses.

I've never been a believer in keeping separate finances in a marriage myself, but then again, I'm young and have never had the experience of marrying late in life to somebody financially independent, so I suppose I could understand it. I'm curious, why not just file taxes separately then if the goal is to maintain separate finances? If the answer is either to pay lower taxes or because the lower-earning spouse is allowed to spend the higher-earning spouse's income, then I would argue you're not really all that separate anyway, so you may as well just get over the whole separation thing and manage the portfolio as a whole. If it makes your spouse feel better, let them keep separate cash reserves in case of a separation or something, but perhaps pitch the idea of aggregating future income in a joint account as a way of managing the household finances holistically. Especially with such a large difference in income, I just don't see the whole yours vs. mine thing being very healthy or sustainable, and I don't think combining future income necessarily has to come at the expense of keeping the separate balances you have now.

Edit: Forgot to add that "no shared financial vision" is often code for the higher-earning spouse disapproving of the lower-earning spouse's spending habits. I'm not saying that's necessarily the case in your marriage, but if it is, that's really something worth discussing with your spouse. It's often the case that both sides have valid reasons for feeling wronged; the higher earner feels their work is taken for granted, while the lower earner feels stripped of power despite doing most of the domestic work. There's really no way around this other than to talk about it and get on the same page. Lucky for me, my wife was on board with aggressive saving to achieve FIRE from the get-go, but there were also times we disagreed on things. The most obvious example was when to buy a house. I was very hesitant to take on a huge amount of debt and tie ourselves to a location, but she wanted the stability of a home and to get ahead of rapid housing appreciation in the area. Eventually, the right timing just made itself apparent when interest rates plummeted and we were talking about starting to have children, but we might not have pulled the trigger so suddenly had we not talked about our shared motivations.
+1

I've been married three times, and my wife two times, celebrating 30 years in 2022 on our current and last one. I've tried it both ways, and the only thing that worked was combining all income and treating it as an equally shared asset, not keeping score on who made what. "Independence" on a personal level is vital in my opinion in order to keep a separate identity, but for finances, the desire for independence usually underlies a problem that hasn't been fully recognized or dealt with.

I was the higher earner, but when I got laid off for 6 months at age 60, my wife supported me and didn't even bring up the fact that she was the sole provider. In fact, we celebrated that occasion to take an extended vacation to Hawaii, on her dime. It was tempting to relax and consider myself a "kept man" but alas, I was working again soon after the vacation ended. I'm not sure the stress level would have been so low if we had a history of keeping our finances separate.

Additionally, if the government considers our income as combined, why shouldn't we? Funny though how the one thing that the government considers separate is IRA savings and the RMD amount on those assets. I guess trust only goes so far.
MrJedi
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Re: Spousal Income Differential

Post by MrJedi »

Tax optimal would be treating all income as one bucket and making decisions on tax deferral based on that one bucket. You probably know this but all of your income combines into one line on your tax return when married filing jointly (almost always tax optimal for a married couple), therefore your tax decisions should be based on a combined income. Agree with others that optimizing while making tax decisions in separate silos is not really possible.

There was a thread a year or two back about a couple who had separate finances but filed jointly, and they were trying to figure out how to split the income taxes due each year. They had been dividing the overall tax liability in half but that clearly is not fair to the lower earning spouse due to the progressive brackets. There were some more fair suggestions but very complex. Like filing mock separate tax returns for each spouse in addition to the MFJ tax return, calculate the overall tax savings when MFJ and then divvy that up. As mentioned, extra complexity when trying to optimize but keep finances separate.
KlangFool
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Re: Spousal Income Differential

Post by KlangFool »

OP,

What is the problem? The higher income spouse pays the lower income spouse x amount of money to contribute to Solo 401K fully. The negotiation is on what x should be.

For example, if x is 25K, why would the lower income spouse object?

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RealSunset
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Re: Spousal Income Differential

Post by RealSunset »

Since there was the phrase "later in life", hope you and spouse are both in good health but should spouse fall seriously ill, depending on where you live, because of your income your spouse might not qualify for some benefits that spouse might otherwise be entitled to. So if that's a possibility, you might want to start planning.
Also, in terms of optimizing, might there be Social Security strategies that might apply in your case, to benefit your spouse? If you're at that age.
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JoeRetire
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Re: Spousal Income Differential

Post by JoeRetire »

kt_belle wrote: Mon Jan 24, 2022 11:31 pm Spouse and I struggle to have a shared financial plan or vision. Our HHI is approximately $250,000. I earn roughly $225k through corporate employment and spouse earns $25k via self-employment. The income differential makes planning a challenge. What financial and tax strategies should we be using to optimize this situation? I have not seen much written on the topic of spousal income differential and financial optimization.
What does "optimize" mean to you in this context?

If you want to share a plan and vision, the only way to accomplish that is through discussion. What have you tried so far?

If you want to optimize tax strategies you should work with a CPA.
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JoeRetire
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Re: Spousal Income Differential

Post by JoeRetire »

kt_belle wrote: Tue Jan 25, 2022 1:14 am *I should add we married later in life and keep separate accounts just due to long-standing financial independence.
So you need two strategies apparently.
A CPA or other tax specialist could help.
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AnEngineer
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Re: Spousal Income Differential

Post by AnEngineer »

dboeger1 wrote: Tue Jan 25, 2022 1:51 amIf it makes your spouse feel better, let them keep separate cash reserves in case of a separation or something, but perhaps pitch the idea of aggregating future income in a joint account as a way of managing the household finances holistically.
There's no need to change accounts if that's a hang up. If you treat all money as belonging to both of you (it probably is legally anyways) that's sufficient. If you only learn about half your finances when filing taxes, you're flying half blind.

OP, you mentioned taxable income of $186k, is that the right term it was it your AGI? If the latter, you should be eligible for Roth IRA and tIRA for spouse.
lasky
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Re: Spousal Income Differential

Post by lasky »

My wife earns more than you and some years I earn less than your husband. If we had separate finances there's simply no way I'd feel comfortable diverting all or most of my meager income to investments. Taxable or Roth, maybe, but something where it's harder to access, nope. (Edited to add: DVMResident's way of handling this, mentioned in the next post, would appeal to me in that situation.)

The first step is to probe beyond "He doesn't care about tax optimization" and figure out what emotions are driving his desire to keep his money easily accessible.
Last edited by lasky on Tue Jan 25, 2022 8:01 am, edited 1 time in total.
DVMResident
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Re: Spousal Income Differential

Post by DVMResident »

kt_belle wrote: Tue Jan 25, 2022 1:12 am I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
Your spouse could easily setup a solo 401(k) and you send him funds to his bank account to compensate for the loss of income stream.

Payroll will usually allow you to split your check into multiple accounts. Just send some funds to his account.

This will lower the total household tax bill. It does require a “we win together” mentality.

———

In my marriage, we have a large differences in salary. I’m the higher earner and do something similar.
Parkinglotracer
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Re: Spousal Income Differential

Post by Parkinglotracer »

Deleted

No experience with the separate accounts thing

That seems very complicated
hoofaman
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Re: Spousal Income Differential

Post by hoofaman »

What's the purpose of a married couple planning separately? If the marriage ends, the assets would be divided in half and the higher earner would continue to pay half of their income to the lower earner as maintenance going forward
bradinsky
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Re: Spousal Income Differential

Post by bradinsky »

Somehow, this seem more mental/emotional than anything. For the vast majority of our marriage, DW stayed home taking care of our children & home. She made very little, but contributed greatly. That wasn’t an issue & if we needed more $$, I just worked more. We just passed our 50th anniversary & we’re doing okay.
Luckywon
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Re: Spousal Income Differential

Post by Luckywon »

hoofaman wrote: Tue Jan 25, 2022 8:07 am What's the purpose of a married couple planning separately? If the marriage ends, the assets would be divided in half and the higher earner would continue to pay half of their income to the lower earner as maintenance going forward
It's unlikely tha property acquired before marriage that was maintained separate would be divided in half upon divorce.

Your blanket statement about spousal support is a simplification that may not apply to many, or most, divorces.
sailaway
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Re: Spousal Income Differential

Post by sailaway »

We kept separate accounts for many years, but we still planned as a team. When the split looked similar to what you have said, the higher earner paid all the household bills, and would give the lower earner money for the asking. The lower earner did indeed have a solo 401k where most of their income went. We have never set a personal allowance, but it might be helpful for some couples. The lower earner is an authorized user (not joint owner) on the higher earner's credit cards just to make choices about maximizing points.

With that being said, we do have a joint checking account these days, as the higher earner had some health issues that made it difficult for them to keep up with the bills for awhile. So the now non earner makes sure all the bills are paid. All of our other accounts are still individual.
humblecoder
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Re: Spousal Income Differential

Post by humblecoder »

kt_belle wrote: Tue Jan 25, 2022 1:12 am I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
Why not just contribute some of your money towards a solo 401k on your spouse's behalf? Problem solved!
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Re: Spousal Income Differential

Post by CoastLawyer2030 »

kt_belle wrote: Tue Jan 25, 2022 1:12 am I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
kt_belle wrote: Tue Jan 25, 2022 1:14 am *I should add we married later in life and keep separate accounts just due to long-standing financial independence.
I earn about $160,000 a year and my wife has earned about $35,000 per year since we had kids (three years ago). We view our financial life as one unit. We have one checking account, one savings account, one brokerage account, and then our retirement accounts.

This allows my wife to max her 401k at work ($35,000 - $20,500 = $14,500 AGI). Her most recent paychecks are for $300ish per pay because so much goes to her 401k. And it is completely irrelevant because we have one checking account, and everything goes in and out of there, and she lives off my income, and I earn that income because she is home taking care of the kids/house.

If you are asking how to nudge your spouse, and I think I may have even done this, perhaps go through your yearly expenses (it's January so now is a good time to review 2021). I am presuming you are married filing jointly. If that is the case, then I can almost guarantee that taxes are either your first or second largest expense for the year.

So the sell is, "Hey, let's be more strategic to reduce our taxes. That will save more money than cutting anything else in our budget. With lesser taxes we keep more of our money, we build a future for ourselves by paying ourselves first, and we can use the money we are saving on taxes to travel and go out on date nights."
bluebolt
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Re: Spousal Income Differential

Post by bluebolt »

CoastLawyer2030 wrote: Tue Jan 25, 2022 10:04 am We view our financial life as one unit. We have one checking account, one savings account, one brokerage account, and then our retirement accounts.
Viewing your financial life (and goals) as one unit is independent of what account structure you choose.
shess
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Re: Spousal Income Differential

Post by shess »

kt_belle wrote: Tue Jan 25, 2022 1:12 am I meant what can be done, primarily from a tax optimization standpoint. The lower earner is not really concerned about taxes, given historically not paying a lot of tax. Our effective tax rate is about 20%. I'd like to see a solo 401k set up to increase retirement savings from self-employed earnings and minimize taxable income. I already max HSA, 401k, dependent care, etc. If he opts not to do this, I believe the best alternative is to channel savings into a 529 plan for child's education, right?
I'd give him money to fund the solo 401k because I wouldn't want to get to retirement and find out he has nothing saved up. Watching him survive on ramen while I'm eating steak would make me uncomfortable.

More generally, though, you should figure out what the actual rules would be in case you ever got divorced. If anything happening after your marriage would be split up evenly, then keeping things excessively independent is wasted. I mean, keep your separate pre-marriage accounts if that makes you feel better, but if your post-marriage 401k contributions and earnings would likely be divided in a divorce, and you're likely to support him from your 401k if you stay married, then it's silly to not fund a solo 401k for him. It doesn't gain anything other than reducing the size of your eventual 401k assets.
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BrooklynInvest
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Re: Spousal Income Differential

Post by BrooklynInvest »

shess wrote: Tue Jan 25, 2022 10:30 am
I'd give him money to fund the solo 401k because I wouldn't want to get to retirement and find out he has nothing saved up. Watching him survive on ramen while I'm eating steak would make me uncomfortable.
I think this is right. We're in a similar dynamic. We married later and keep some separate accounts. Today we have a similar income differential but wasn't always the case.

If I'm understanding correctly you want to lower your collective taxes but for your spouse it'd be problematic for him to contribute $15k to say a solo 401k on an income of 20?

Give him some of the money to fund it. Good luck OP.
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Re: Spousal Income Differential

Post by Broken Man 1999 »

bluebolt wrote: Tue Jan 25, 2022 10:17 am
CoastLawyer2030 wrote: Tue Jan 25, 2022 10:04 am We view our financial life as one unit. We have one checking account, one savings account, one brokerage account, and then our retirement accounts.
Viewing your financial life (and goals) as one unit is independent of what account structure you choose.
Absolutely!

Being married does not mean you are not individuals. DW and I have but one joint account, our Vanguard Brokerage account. We have $31.84 in that account.

When we had bills that needed joint income, we had a joint checking account. I don't like having anyone else messing around in an account I have, not writing down checks, etc. So once we had no mortgage, no joint accounts except the one. We have no joint credit cards.

In retirement we split billpaying the way we always did, I pay the bulk of the bills, she pays a number of smaller bills. I subsidized a lot of her 401k and IRA contributions over the years, so now she has a decent sized pot of funds on her own. Only fair as she was a SAHM for our three daughters, supporting my heavy business travel. She had a gap of ten years in her career. When she returned to the workforce she did fine, but the gap certainly hurt her earnings. I think sometimes those type sacrifices aren't always as appreciated as they should be.

If we decide to do a major purchase, we each pay for some of it. Or I pay 100%.

What she does with her money (SS and a very small distribution from her TIRA each month), assuming her share of the bills are paid, I care not. None of my business. We have no need to monitor our personal spending, and we don't.

We have been married 50 years as of November of 2021. So far it has worked just fine. Our finances are separate, but our goals have always been joint.

Broken Man 1999
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Picasso
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Re: Spousal Income Differential

Post by Picasso »

VGisforme wrote: Tue Jan 25, 2022 12:50 am What exactly is challenging? I’m not sure what you are getting at here. Does she not share your financial goals? Income disparity has no real bearing on that.

I need some concrete examples of your challenges. What would be different if you both made $125k?
Who said is a she?
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Re: Spousal Income Differential

Post by CoastLawyer2030 »

Broken Man 1999 wrote: Tue Jan 25, 2022 11:25 am
bluebolt wrote: Tue Jan 25, 2022 10:17 am
CoastLawyer2030 wrote: Tue Jan 25, 2022 10:04 am We view our financial life as one unit. We have one checking account, one savings account, one brokerage account, and then our retirement accounts.
Viewing your financial life (and goals) as one unit is independent of what account structure you choose.
Absolutely!

Being married does not mean you are not individuals. DW and I have but one joint account, our Vanguard Brokerage account. We have $31.84 in that account.

When we had bills that needed joint income, we had a joint checking account. I don't like having anyone else messing around in an account I have, not writing down checks, etc. So once we had no mortgage, no joint accounts except the one. We have no joint credit cards.

In retirement we split billpaying the way we always did, I pay the bulk of the bills, she pays a number of smaller bills. I subsidized a lot of her 401k and IRA contributions over the years, so now she has a decent sized pot of funds on her own. Only fair as she was a SAHM for our three daughters, supporting my heavy business travel. She had a gap of ten years in her career. When she returned to the workforce she did fine, but the gap certainly hurt her earnings. I think sometimes those type sacrifices aren't always as appreciated as they should be.

If we decide to do a major purchase, we each pay for some of it. Or I pay 100%.

What she does with her money (SS and a very small distribution from her TIRA each month), assuming her share of the bills are paid, I care not. None of my business. We have no need to monitor our personal spending, and we don't.

We have been married 50 years as of November of 2021. So far it has worked just fine. Our finances are separate, but our goals have always been joint.

Broken Man 1999
Everyone is free to do their own mental accounting (manifested in financial accounts) so their head feels good on the pillow at night. I am unspeakably lazy and your system would keep me up at night. To each their own.
bluebolt
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Re: Spousal Income Differential

Post by bluebolt »

CoastLawyer2030 wrote: Tue Jan 25, 2022 12:14 pm Everyone is free to do their own mental accounting (manifested in financial accounts) so their head feels good on the pillow at night. I am unspeakably lazy and your system would keep me up at night. To each their own.
With direct deposit, automatic transfers, and automatic bill pay, just about any account setup can meet a lazy person's needs.
runner540
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Re: Spousal Income Differential

Post by runner540 »

kt_belle wrote: Mon Jan 24, 2022 11:31 pm Spouse and I struggle to have a shared financial plan or vision. Our HHI is approximately $250,000. I earn roughly $225k through corporate employment and spouse earns $25k via self-employment. The income differential makes planning a challenge. What financial and tax strategies should we be using to optimize this situation? I have not seen much written on the topic of spousal income differential and financial optimization.
You earn 9:1.
I’ve earned 4-5:1, currently at ~3:1. We optimize by maxing every tax deferred account available and pooling our net income.
For example, we just switched health insurance from mine to his. My net pay went up, his down, but none of our spending changed because the total amount didn’t change.
It all goes into one pot.
How do separate accounts work when there is a minor child?
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Re: Spousal Income Differential

Post by stoptothink »

runner540 wrote: Tue Jan 25, 2022 12:52 pm
kt_belle wrote: Mon Jan 24, 2022 11:31 pm Spouse and I struggle to have a shared financial plan or vision. Our HHI is approximately $250,000. I earn roughly $225k through corporate employment and spouse earns $25k via self-employment. The income differential makes planning a challenge. What financial and tax strategies should we be using to optimize this situation? I have not seen much written on the topic of spousal income differential and financial optimization.
You earn 9:1.
I’ve earned 4-5:1, currently at ~3:1. We optimize by maxing every tax deferred account available and pooling our net income.
For example, we just switched health insurance from mine to his. My net pay went up, his down, but none of our spending changed because the total amount didn’t change.
It all goes into one pot.
Same. Our income differential has run the gamut; early in our marriage I made 4x what she did, then she stayed at home, then she went back to work earning 1/3 of what I did, and now she earns (a little) more than I do - it has never influenced any of our planning. Whatever we earn collectively goes into one pot...and she spends it. If you are filing jointly, what tax strategies could their possibly be?
Living Free
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Re: Spousal Income Differential

Post by Living Free »

I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
bluebolt
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Re: Spousal Income Differential

Post by bluebolt »

Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
Separate accounts is not the same as "keeping totally separate finances."
oldfatguy
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Re: Spousal Income Differential

Post by oldfatguy »

runner540 wrote: Tue Jan 25, 2022 12:52 pm
How do separate accounts work when there is a minor child?
Why would child expenses be any different than housing, utilities, etc.?
Living Free
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Re: Spousal Income Differential

Post by Living Free »

bluebolt wrote: Tue Jan 25, 2022 1:28 pm
Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
Separate accounts is not the same as "keeping totally separate finances."
I'm not sure what you mean. I was making a more generalized statement. I agree that separate accounts is not the same as totally separate finances.
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Re: Spousal Income Differential

Post by Broken Man 1999 »

Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
Well, if kicking someone out of the home due to no longer having money is part of the joint goals, then I suppose it would be alright. :D

Simply stated, joint goals do not have to have joint accounts. We had some when it was convenient, but none for a long time, now.

I'm pretty sure the bills we pay each month have no idea where the money came from. In our case, some $$ come from DW's account, some $$ come from my account.

If DW doesn't pay her bills, there is no food in our casa, no gas in our van, and our cell phones wouldn't work. If I don't pay my bills, there is no internet service, no homeowner and auto insurance, no electricity or water... on and on. Both of us would catch on quickly if one of us became a slacker. :shock:

Maybe the way we think is because DW and I are products of the 1970ties. Remember Helen Reddy's song lyrics, I am woman hear me roar? That is my wife. She is a self-confident woman who is more than capable of handling her individual and her marital financial affairs. She is an equal partner in our marriage.

What need do I have to know about my wife's discretionary spending, or my wife's need to know about my discretionary spending? That screams lack of trust, to me. Believe me, I could have hidden money easily when we had joint accounts, as my commission checks were separate.

Previous generations of marriages were different. I don't think my mother worked a day outside the home in her entire life. My mother ran the household, using my father's paycheck. She literally had no money of her own. Much different today.

If one fears they would be kicked out of the shared home if they ran out of money or would kick someone out of a shared home if they ran out of money, then I would say that is a very flawed view of marriage in general. Those type issues describe roommates, not equal partners in a marriage.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
bluebolt
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Re: Spousal Income Differential

Post by bluebolt »

Living Free wrote: Tue Jan 25, 2022 1:48 pm
bluebolt wrote: Tue Jan 25, 2022 1:28 pm
Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
Separate accounts is not the same as "keeping totally separate finances."
I'm not sure what you mean. I was making a more generalized statement. I agree that separate accounts is not the same as totally separate finances.
Didn't realize that. To what were you referring when you mentioned "totally separate finances." Did someone reference that in this thread?
Living Free
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Re: Spousal Income Differential

Post by Living Free »

Broken Man 1999 wrote: Tue Jan 25, 2022 2:59 pm
Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
...

If one fears they would be kicked out of the shared home if they ran out of money or would kick someone out of a shared home if they ran out of money, then I would say that is a very flawed view of marriage in general. Those type issues describe roommates, not equal partners in a marriage.

Broken Man 1999
I agree. I was taking the point to the extreme and presumably nobody would actually do that. I think it is important for the spouses to have shared goals and openness and discussion regarding their finances. If things are too separate (eg one spouse likes to buy fancy cars and the other likes to invest in retirement plans) then that could create some significant issues later in life (eg the fancy car buying spouse might need to work longer while the dutiful investor spouse is retired and wishing the still working spouse could spend time travelling or etc together).
Living Free
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Re: Spousal Income Differential

Post by Living Free »

bluebolt wrote: Tue Jan 25, 2022 3:02 pm
Living Free wrote: Tue Jan 25, 2022 1:48 pm
bluebolt wrote: Tue Jan 25, 2022 1:28 pm
Living Free wrote: Tue Jan 25, 2022 1:09 pm I suppose it is more complicated after divorce and re-marriage and etc. But I also don't see how keeping totally separate finances can work out. For instance, what if one spouse didn't save enough for retirement and runs out of money - in their old age is the more well off spouse going to evict the less well off spouse from their shared home and refuse to pay for meals and medical services and etc???
Separate accounts is not the same as "keeping totally separate finances."
I'm not sure what you mean. I was making a more generalized statement. I agree that separate accounts is not the same as totally separate finances.
Didn't realize that. To what were you referring when you mentioned "totally separate finances." Did someone reference that in this thread?
I don't think anyone mentioned "totally separate finances" but as I just explained further in another post above I was taking the point to the extreme with regards to separating vs combining finances in marriage and more importantly being open and discussing goals and strategies for long and short term financial planning (which this thread does address - see comments farther down-thread from OP regarding OP's husband not having much interest in tax planning or possibly in contributing to a retirement account).

In any case, I agree with prior recommendations that the lower earning spouse should use retirement accounts available such as a solo 401k and possibly backdoor Roth, possibly using all his income for that then using some of the income that was technically earned by OP for spending money.
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Re: Spousal Income Differential

Post by dboeger1 »

Perhaps I'm reading too much into it and this doesn't apply to OP, but for all the people saying separate accounts do not imply separate finances, yes, that is technically true, but those can be connected at times, and for reasons that go beyond just wanting financial independence. Victims of domestic abuse or spouses of addicts and such might view a separate personal account as an emergency escape hatch that has nothing to do with legal ownership. A less sinister but equally serious example would be an immigrant spouse who is less established in their new home country and feels they need security reserves in case of legal troubles, unexpected separation, deportation, etc.

I didn't get any of those vibes from OP's post, but I did get the feeling that since both spouses were financially independent long before this marriage, they hesitate to co-mingle premarital assets, which is a fairly natural human behavior and does bring with it certain legal protections in some jurisdictions. My only point was that for the sake of optimizing current finances (which is what OP was asking about), it makes sense to consider all future income together regardless of their separate premarital assets; in other words, they shouldn't let their premarital portfolios and income differential dictate how they manage new income, especially if it's costing them because of under-utilization of tax-advantaged space or other such opportunities.
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Re: Spousal Income Differential

Post by celia »

CoastLawyer2030 wrote: Tue Jan 25, 2022 12:14 pm Everyone is free to do their own mental accounting (manifested in financial accounts) so their head feels good on the pillow at night. I am unspeakably lazy and your system would keep me up at night. To each their own.
That’s probably because you appear to be a lawyer. Aren’t lawyers trained to look at the worst case scenario instead of how two parties can both benefit?

Of course, if two parties could figure out how they could both benefit, they wouldn’t need lawyers.
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celia
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Re: Spousal Income Differential

Post by celia »

hoofaman wrote: Tue Jan 25, 2022 8:07 am What's the purpose of a married couple planning separately? If the marriage ends, the assets would be divided in half . . .
The purpose is to be able to make some choices that are different from each other. Note that pre-marital assests that were kept separate from joint accounts and inherited accounts belong to only the one individual, should they divorce.

In our case, we had “nothing” when we married years ago, just after college. But each of us has inherited and we’ve kept our inherited accounts separate. I am using some of my separate money to help relatives on my side of the family, since that’s where the money came from. His money is separate and he is free to spend it on his relatives or on himself. We have different beneficiaries for the separate accounts since we both come from large families and both sides have disabled relatives who will need more money.

Meanwhile our kids will likely inherit enough from our joint accounts.


OP, Before you married, did you each disclose your assets and incomes and credit reports? Do you have pre-nups that prevent you from having joint accounts? Have you each kept your pre-marital assets separate? Have either of you inherited? Do you now have joint accounts?

Lastly, have you done joint estate planning? Would discussing that make it easier to see where you both stand now? You can’t make optimal choices/decisions unless you both understand where you are financially. Do you have a list of all accounts for both of you, the account title, and the balance of each? That’s where I would start.
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Re: Spousal Income Differential

Post by dink2win »

I believe that as long as your AGI as a joint couple is under $204,000 you can contribute to a Roth IRA directly. If over, you can backdoor. While a backdoor will not do anything to lower your taxes now, it definitely is a taxed advantaged account that I'm sure 95% of the folks here would recommend. He does not even need to pay into it, you can just transfer the money into his account as a spouse.

As many others mentioned, you can open up a solo 401k under your spouse's name and you can pay him to max it out, if you cannot convince him to fund it himself. I am assuming you are maxing out the HSA as a family contribution account. I personally would not put too much money into the 529, while it is a tax deferred, its pretty restricted on what it can be used for, and what if your kid gets a full scholarship, or decides not to go to college? Then you have money you can't use or need to take penalties on.

Like others said, just plan as a whole unit, don't be caught up so much in who pays for what. If the spouse doesn't want to fund it themself because it reduces their take home too much, just transfer the 401k amount each month into their checking and they will be made whole.
basspond
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Re: Spousal Income Differential

Post by basspond »

You can start by combining accounts. Your spouse might have more skin in the game if they knew that all your accounts are joint. How would you feel if your spouse wanted to keep accounts separate because they made more?
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