Asking questions and planning will give you both peace of mind
Combining love, lives and laundry is one thing. Combining your money is another. Newly married couples who both work would do well to think about what to do with two incomes. Here are some pointers.
New couples usually wonder how to improve their finances. Easy: Start talking about “your money” as “our money” and plan as a couple. Once you marry and support one household with two incomes, shift your thinking.
You don’t bring in two incomes now – you bring in one bigger income that opens financial planning doors.
Different Life Events Require Planning
Early marriage before kids – and their expenses – is the perfect time to use the combined income to ramp up retirement contributions, slash debt and build an emergency fund.
Thinking about starting a family in a few years? Children bring expenses would-be parents can’t imagine before they actually become moms and dads. Set up your budget so one spouse’s income between now and then goes for bills and monthly living expenses and allocate the other income toward such financial priorities as paying down debt, building savings, and investing for retirement.
The formulas and planning change after kids arrive. One parent might stay home, for example, take extended parental leave or return to work only part-time.
Daycare can swallow a lot of household income – with both parents working full time and paying daycare’s rising costs, the couple often just break even. Recent reports cite that daycare consumes almost a third of one income in a two-income home – and in some places, a year of daycare can cost more than a year of public college.
Remember that spending all of both incomes before kids can potentially make any or all of these options impossible.
Each Other Questions
If having a family stands to change how much time you spend at (paying) work, talk about this with your spouse before children and start planning as a couple. Ask each other:
- How will things change once we have a baby?
- What is our ideal scenario?
- How can we move one step closer to our ideal scenario?
For example, if student loans weigh on you emotionally, figure out how much more you can allocate toward your debt each month. Investigate whether you qualify for student loan forgiveness programs, too. Several exist now for certain types of workers.
Don’t Ignore Retirement Completely
If having a parent stay at home matters most, focus on saving for retirement now so your retirement assets can grow while one parent isn’t working.
Don’t forget spousal individual retirement accounts, which allow a working spouse to contribute to a nonworking spouse’s IRA or Roth IRA. To qualify for spousal IRA contributions, you two must file a joint tax return. Spousal IRAs are also subject to the same annual contribution limits, income limits, and catch-up contribution provisions as traditional and Roth IRAs.
Couples able to live off one income may endure less stress and enjoy more flexibility with their budget. They can create options and opportunities for their family situation and taking the time to plan may lead to a more confident future together.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
This material was created for educational and informational purposes only and is not intended as tax or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
This article was prepared by RSW Publishing.
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