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Three Ways LGBTQ Couples Can Minimize Taxes and Optimize Their Retirement

LGBTQ couples need to plan for each other's retirement plan or IRAs.

By Ryne Vickery, CFP®

Because married couples are granted rights under the law that unmarried couples do not have, the Supreme Court’s 2015 ruling in favor of marriage equality ultimately changes the way same-sex couples must approach their financial planning and financial goals. One important consideration is how to plan for each other’s retirement plan or IRAs. While money shouldn’t be the primary reason for anyone to get married, the choice to marry or not to marry could make all the difference for whether a couple faces financial prosperity or financial struggle.

As a Wealth Advisor with Buckingham Strategic Wealth, Ryne Vickery, CFP®, works with his advisory team to develop comprehensive financial life plans for professionals, retirees and near-retirees, and same-sex couples who want to align their money with their goals and values.

Ryne Vickery, CFP

Importance of Maxing Out Retirement Accounts

Retirement account balances don’t grow out of thin air. You must first make contributing to them a financial priority. Then, choose your investments wisely, and watch the fruits of your labor grow. But why is it important to max out your retirement account contributions as much as you can (at least up to the allowable IRS limits)? In most cases, your contributions are pre-tax, assuming they are put into a tax-deferred retirement plan or IRA.

For example, a couple at the 35% tax bracket who contributes $10,000 to a tax-deferred retirement plan avoids paying $3,500 of income tax that year. On the other hand, if that couple chooses to save $10,000 not in a tax-deferred retirement plan, they must first pay 35% income tax, which leaves them with $6,500 of investable money. By maxing out your retirement accounts, you defer having to pay a significant amount of taxes until after you retire. This keeps more money in YOUR pocket and hopefully growing over time, reducing the likelihood you run out of money.

How to Fund Your Lifestyle While in Retirement

One of the first questions people ask themselves when approaching retirement is, “Which accounts will fund my expenses when I no longer have a paycheck coming in?” While each situation is different, the answer generally can be determined by how your different accounts are taxed.

First, you should consider spending dollars that are not in a retirement plan. For example, if you have money invested in a joint brokerage account, you only pay taxes on realized gains. These gains are taxed at the capital gains tax rate, which is currently set at 15% (20% for the highest tax bracket) and should be lower than your ordinary income tax rate. Money you take from your tax-deferred retirement account would come at that higher rate for ordinary income. Again, the goal is to avoid paying higher taxes for as long as you can.

Next, you’ll want to look at your retirement plan or traditional IRAs. Ideally, you should avoid taking money out of these accounts until age 72, which is when you are required to begin withdrawing. While there are other tax strategies you should also consider pre-72, such as a Roth conversion, you’ll generally want to defer paying taxes on your withdrawals until you absolutely must.

Finally, if you have money in a Roth IRA, this is the last place to take withdrawals. Because a Roth IRA has tax-deferred growth and tax-free withdrawals, you’ll likely want to allow this to grow for as long as possible without touching it.

Inheriting Your Spouse’s Accounts

Perhaps the biggest advantage to choosing marriage when it comes to optimizing retirement plans is the ability to inherit your spouse’s accounts. A spousal beneficiary has an enormous tax advantage over a non-spouse beneficiary because a spouse can assume the deceased spouse’s IRA as their own and not be required to take withdrawals until age 72 (and beyond). For non-spouse beneficiaries, the SECURE Act of 2019 now mandates that, in most situations, the inherited IRA must be fully exhausted within 10 years.

For example, a $1 million IRA inherited in 2020 must be withdrawn (not necessarily spent) by 2030, meaning you are required to pay ordinary income tax on the withdrawals within that 10-year period. For a retiree at the 24% tax bracket, a $1 million inherited IRA would mean paying $240,000 of taxes (and with growth, likely more). A spousal beneficiary has no specified timeframe to exhaust their full IRA. Instead, they can take out only what they require (or need) each year, and the remainder is passed along to their beneficiaries. With a Roth IRA, it gets even better, as the inheriting spouse has no requirement to ever withdraw money from the account.

While there are some exceptions that allow a surviving unmarried partner to stretch withdrawals out over their lifetime, they would likely be required to begin withdrawing immediately, creating less overall flexibility.

Again, the choice to marry shouldn’t solely be based on finances, but there are distinct financial advantages to doing so. Understanding how this decision may affect your financial future as a couple is a vital step in achieving the comfortable and fulfilling retirement you’re working toward.

About the author: Ryne Vickery, CFP®

As a Wealth Advisor with Buckingham Strategic Wealth, Ryne Vickery, CFP®, works with his advisory team to develop comprehensive financial life plans for professionals, retirees and near-retirees, and same-sex couples who want to align their money with their goals and values.

Important Disclosure: The information contained in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Individuals should seek advice from qualified tax professionals prior to implementing tax strategies. The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. IRN-20-1471