When saving for retirement, married couples often have an advantage over single people due to the power of numbers. However, it can be challenging for married couples to decide where and how much to contribute when one spouse is the breadwinner or both spouses are working. The IRS provides various guidelines to guide how retirement savers can contribute to their retirement accounts to maximize their savings.
The IRS requires that 401(k) accounts must remain in each person’s name, and you cannot combine two 401(k)s belonging to two spouses. Each spouse can have a 401(k) of their own and in their name. If both spouses are working, they can participate and contribute to the employer’s 401(k) plan. Married couples filing jointly must decide how much they will contribute to their respective retirement accounts to avoid exceeding the IRS contribution limit. For 2021, the IRS 401(k) contribution limit is $19,500 (if you are below 50) or $26,000 if you are age 50 or older. If the employer provides a match, the IRS limit is $58,000, or 64,500 if you are age 50 or older.
Can You Open a Joint 401(k) as a Married Couple?
While it is possible for married couples to open a joint bank account, you cannot open a joint 401(k) even if you are a couple. IRS rules require that retirement accounts such as 401(k)s and IRAs be individually-owned, and you cannot co-own your spouse’s 401(k) account or move funds between the retirement accounts.
Spouses suffer no harm in maintaining their own retirement account. The two 401(k)s can grow in tandem by choosing investments that meet their financial goals. The goal of the spouses should be to create a diversified portfolio comprising a mix of short-term and long-term assets.
However, it is possible to have joint taxable investment accounts as a couple. For example, you can open a joint brokerage account as a married couple to buy and sell securities such as stocks, bonds, and ETFs. A brokerage account has various pros such as no income limits, tax benefits, and no funding restrictions, which make it more flexible than a 401(k) account. On the downside, brokerage accounts may have higher fees and higher risks than a traditional retirement account.
Can I Rollover My 401(k) to My Spouse’s 401(k)?
401(k) rollover allows participants to move funds from their 401(k) account to another qualified retirement account without paying income tax and penalties. However, the IRS requires that rollovers can only be made between accounts that share the same owner and taxpayer ID. Therefore, you cannot rollover your 401(k) to your spouse’s 401(k) since the two accounts do not have an identical taxpayer ID.
If you want to transfer money from your 401(k) and deposit it into your spouse’s 401(k), you can instead withdraw the money from your 401(k) and deposit it into the other spouse’s 401(k). However, this transaction will be considered a distribution, and you will pay income taxes on the distribution, plus a penalty tax if you are below 59 ½.
How can Married Couples Max Out Their 401(k)?
If you and your spouse are both working and the employer provides a 401(k), you can contribute up to the IRS limits. For 2021, each spouse can contribute up to $19,500, which amounts to $39,000 annually for both spouses. If you and your spouse are already 50 years, each spouse can make an additional $6,500 in catch-up contributions to their account. This increases each spouse’s contribution to $26,000 or $52,000 between the two spouses annually.
If your income does not allow you to max out your 401(k), you can maximize any employer’s match that the employer provides. Usually, an employer may match your contribution up to a certain limit. For example, if your employer offers a 5% match, and your spouse’s employer offers an 8% match, you should try to collect all the matches, since it equates to getting free money for your retirement savings. You should also compare the 401(k) fees you incur and the investment options that the plan sponsor provides. If the fees are too high, you can rollover 401(k) to an IRA with lower fees and more investment options.
401(k) Contributions with One Working Spouse
When there is only one working spouse, both spouses should determine what makes sense for the family. The working spouse should max out his/her 401(k) contributions, and collect any employer’s match or profit-sharing contributions provided by the company. If the working spouse has additional income to save, he/she can contribute to an IRA in addition to the 401(k) contributions. IRAs have an annual contribution limit of $6,000. There is an extra $1000 catch-up contribution for those age 50 or older.
An often overlooked retirement account is a spousal IRA. This type of IRA allows the working spouse to contribute to an IRA that is in the name of the non-working spouse, who has little or no income. A spousal IRA is not a joint account; rather, it is a regular traditional IRA that married couples filing jointly can use to increase their IRA contributions. A spousal IRA allows both couples to contribute up to $12,000 annually, or $14,000 (including catch-up contributions) if both spouses are above 50.
401(k) Contribution for Spouses with a Side Hustle
If you are running a small business as a solopreneur, you can save for retirement using a solo 401(k). The IRS allows self-employed business owners with no employees (other than a spouse) to save for retirement using a solo 401(k), which is a one-participant 401(k). This retirement account has a contribution limit of 58,000 in 2021 ($57,000 in 2020). You can contribute an extra $6,500 in catch up contributions if you are 50 or older.
Although the Solo 401(k) is a one-participant 401(k), IRS rules provide an exemption if your spouse earns an income from the business. This means you can increase the amount you contribute as a family, since the spouse can make elective deferrals as an employee of the business, up to the $19,500 IRS limit, plus $6,500 in catch-up contribution if he/she is 50 or older. As the spouse's employer, you can contribute up to 25% of compensation to the spouse’s retirement account in the form of profit-sharing contribution.
When You Can Transfer 401(k) Money to Your Spouse’s 401(k)
Certain exemptions allow spouses to transfer 401(k) money between their accounts. These exemptions include:
Death
When opening a 401(k) account, 401(k) participants must designate a beneficiary who will receive a share or all of your retirement savings when you die. Even if you designate another person other than your spouse as the beneficiary, federal law requires the spouse to get your 401(k) money when you die. However, you can choose a non-spousal beneficiary if your spouse authorizes this change in writing when you are still alive.
Divorce
If you get divorced, the court may require you to transfer part of your 401(k) savings to your spouse. During the divorce proceedings, the court may issue a qualified domestic relations order (QDRO), which requires a spouse to distribute part of their retirement plan assets to the former spouse. If the QDRO requires 401(k) to be split 50-50, you must transfer half of your 401(k) assets to your spouse.
