By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
Personal Financial Management program staff often counsel military families about the financial implications of lifestyle transitions. This includes the decision by service members to get married and merge their financial life with a spouse. When a couple gets married, they usually commingle at least some of their personal finances.
Some of the biggest challenges a couple will face include joint goal-setting, establishing accounts at financial institutions, deciding how to pay bills and manage money together, and filing income taxes as a married couple. Both spouses also need to review existing financial documents, such as life insurance policies, IRAs, and 401(k)s, and change the beneficiary designation on these documents to their spouse, if desired.
Marriage is also a good time to draft legal documents such as a will, which stipulates how each spouse’s assets will be distributed. Older couples with substantial funds and/or children from a previous marriage may consider a prenuptial agreement to make decisions in advance about financial matters in the event of death or divorce.
Below are six more recommendations to share with service members who are about to get married:
- Learn About Each Other’s Finances- Exchange tax returns with your spouse from the past 3 to 5 years prior to marriage. This will increase understanding of each other’s finances and assist in future tax planning. Other good sources of information about the financial habits and history of a spouse-to-be are their checkbook register and bank and/or brokerage firm statements.
- Consider the Timing of the Wedding– Remember that marital status on December 31 determines tax filing status for the entire year. Consider postponing the wedding a few months into the next calendar year if it will save a significant amount on income taxes.
- Determine Your Tax Filing Status- Consider the married filing separate filing status option if one spouse has high deductions for, say, medical expenses that would be limited by filing jointly. Generally speaking, however, married couples save the most on income taxes by filing a joint tax return.
- Review Employee Benefit Plans- Compare the costs and benefits of each spouse’s employee health insurance. Sometimes it is cheaper for each spouse to retain their individual employer-provided benefits, at least until family coverage is needed for a newborn child. In other situations, one spouse’s benefit plan is superior to the other and it makes sense to consolidate coverage and name the spouse with inadequate benefits as a covered dependent. Ask your respective human resources departments for assistance, if needed.
- Invest Holistically- Start thinking of each spouse’s employee retirement plans in the context of a couple’s combined investment portfolio. In other words, instead of duplicating each other’s investment selections, consider investing in different types of securities to diversify investments and reduce the risk of loss. For example, if one spouse owns all domestic stock funds, the other might purchase a global securities fund.
- Offset Each Other’s Investments- If one spouse has a higher income but no access to tax-deferred retirement accounts (or plans with poor investment options) and the other spouse has a lower income and available employer retirement savings plans, take advantage of the opportunity to save as much as possible. The higher-earning spouse can “reimburse” (read: transfer money to) the lower-paid spouse to compensate for less take-home pay resulting from an increased retirement savings plan contribution. Both spouses will benefit from the increased tax write-off on a joint federal income tax return.
Perhaps the best financial advice a financial counselor can give to a newlywed couple is to communicate early and often about money. Financial issues are one of the most frequent sources of conflict between spouses so it is important to understand each other’s money history and work on joint financial challenges and goals together.
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