Investing Together: Spouses And Their Separate Funds

Investing as a couple can be tricky, especially when it comes to deciding whether to hold duplicate or separate investments. While some couples may choose to combine their investment accounts, others may prefer to keep them separate. The decision often depends on various factors, such as the couple's financial goals, risk tolerance, and individual investment styles. It is essential to have open and honest communication about money and investing to ensure a long and robust financial future together. Seeking guidance from a financial advisor or wealth specialist can also help couples navigate these complex decisions and determine the best approach for their unique situation.

Risk tolerance

When it comes to risk tolerance, individuals can be classified as aggressive, moderate, or conservative investors. Aggressive investors have a high-risk tolerance and are willing to risk losing money to achieve potentially better results. They tend to invest in stocks, equity funds, and exchange-traded funds (ETFs). On the other hand, conservative investors have a lower risk tolerance and seek investments with guaranteed returns, such as bonds, bank certificates of deposit (CDs), money markets, or U.S. Treasuries. Moderate investors aim to balance risk and reward, typically investing in a mix of stocks and bonds.

Spouses often have different risk tolerances, with one being more aggressive and the other more conservative. It's essential to find common ground and make financial decisions together, considering both partners' interests and goals. Open communication is key to understanding each other's perspectives and aligning values.

• Define your financial goals: Understand what you are investing for, whether it's saving for a home, a child's education, or retirement. Each goal has different time horizons and risk considerations.
• Time horizon: The longer the time horizon, such as saving for retirement, the more risk you can typically take on as there is more time to recover from potential downturns. Shorter-term goals, like saving for a house down payment, require a more conservative approach.
• Comfort with short-term losses: Discuss how comfortable each of you is with potential short-term losses. If you need the invested funds in the near term, you may have to sell at a loss. A longer time horizon provides more flexibility to ride out market fluctuations.
• Non-invested savings: Ensure you have some savings set aside in liquid accounts for emergencies. If a large portion of your savings remains in cash due to investment anxiety, it may indicate a lower risk tolerance.
• Tracking investments: Consider how closely you plan to monitor your investments. If market fluctuations cause anxiety, a diversified portfolio and a long-term focus can help. If you actively look for buying opportunities, you may be more willing to take on risk, but be sure to research your investments thoroughly.

Understanding your risk tolerance as a couple is essential for making informed investment decisions. It's beneficial to seek unbiased advice from a financial advisor to help you align your risk tolerances with your financial goals and create a diversified portfolio that suits your needs.

Joint vs separate accounts

When it comes to investing as a couple, there are several factors to consider when deciding between joint or separate accounts. While some may instinctively want to combine their investments with their spouse, it is important to weigh the pros and cons of both options. Here are some things to consider when deciding between joint and separate investment accounts:

Communication and Shared Goals

Open and honest communication about financial goals and investment strategies is crucial for couples, regardless of whether they choose joint or separate accounts. Discussing and defining your shared goals will help you build an investment strategy that aligns with your vision for the future. This includes agreeing on the level of risk each partner is comfortable with and determining how much you can afford to invest while still maintaining a comfortable daily budget. A wealth advisor can assist in these discussions and help you make informed decisions.

Advantages of Joint Accounts

Combining investment accounts can make it easier to manage finances as a couple. You will have fewer accounts to keep track of, lower management fees, and fewer investments to monitor. Joint accounts can also foster a sense of teamwork and shared responsibility towards your financial goals. Additionally, in the event of the death of one spouse, the surviving spouse will have immediate access to the funds without probate.

Disadvantages of Joint Accounts

One potential downside of joint investment accounts is the possibility of tension or disagreement between spouses, especially if there is a significant disparity in the amount of money each partner has saved or invested. In the event of a divorce, deciding how to divide shared investment accounts can be challenging and may depend on the state you live in and the terms of any prenuptial agreement.

Retirement Accounts

It is important to note that certain types of accounts, such as retirement accounts like 401(k)s or IRAs, cannot be combined between spouses. These accounts must remain individual, as they are tied to employment or specific tax advantages. However, you can add your spouse as a beneficiary to your retirement accounts, ensuring that they will have access to the funds if something happens to you.

Advantages of Separate Accounts

Maintaining separate investment accounts can provide a sense of financial independence and autonomy for each partner. It also allows for personalized investment strategies that align with each individual's risk tolerance and financial goals. Separate accounts can be beneficial if there is a significant age difference between spouses, as it allows for more conservative investments for the older partner.

Disadvantages of Separate Accounts

Separate accounts may lead to higher fees and management costs, as well as added complexity in tracking and managing multiple accounts. Additionally, separate accounts may not provide the same level of teamwork and shared responsibility towards financial goals.

Diversification Strategies

Whether you choose joint or separate accounts, diversification is key to a successful investment strategy. This can be achieved through a combination of individual and joint accounts, with proper asset allocation and a balanced mix of stocks, bonds, and other investments. Seeking advice from a financial advisor or wealth specialist can help you navigate the complexities of investing as a couple and ensure that you make informed decisions that align with your shared goals and risk tolerance.

Retirement accounts

Review Retirement Goals Together:

Spouses should discuss and align their retirement goals, including their desired retirement age, lifestyle expectations, and financial needs. This conversation helps couples understand each other's vision for retirement and enables them to create a cohesive plan.

Name Each Other as Beneficiaries:

Although spouses cannot combine retirement accounts, they can name each other as beneficiaries on their individual retirement plans, such as 401(k)s or IRAs. This ensures that in the event of one spouse's death, the surviving spouse will have access to the deceased spouse's account and funds.

Spousal IRAs:

Spousal IRAs allow a working spouse to contribute to an IRA in their name on behalf of their non-working or low-income spouse. This enables the non-working spouse to build a retirement nest egg even without earned income. To be eligible, couples must file a joint tax return.

Separate IRAs:

Each spouse can open and contribute to their own separate IRAs, maximising their tax benefits. By having separate IRAs, couples can increase their combined annual contributions, doubling the amount they can save for retirement.

Employer Retirement Plans:

Spouses can take advantage of employer-sponsored retirement plans, such as 401(k)s. Even if one spouse contributes the maximum to their plan, the other spouse can still contribute to their own plan up to the annual limit. Some employers may also offer matching contributions or Roth 401(k) options, enhancing retirement savings further.

Self-Employed Retirement Plans:

If either spouse has self-employed income or engages in freelance work, they can contribute to a self-employed retirement plan, such as a Simplified Employee Pension (SEP) or a solo 401(k). These plans provide additional tax-advantaged savings opportunities.

By utilising these strategies, spouses can effectively plan and save for retirement, ensuring they are financially prepared for their future together.

Tax efficiency

Investment Accounts

Investment accounts can be broadly categorized into taxable accounts and tax-advantaged accounts. Taxable accounts, such as brokerage accounts, are suitable for investments that lose less of their returns to taxes. On the other hand, tax-advantaged accounts like IRAs, 401(k)s, and Roth IRAs, are better for investments that tend to lose more of their returns to taxes.

Tax Treatment Diversification

Diversifying investments by tax treatment can help reduce taxes. This strategy, known as "tax diversification," involves spreading investments across accounts with different tax treatments. This approach is especially valuable if there is uncertainty about the tax bracket an individual will fall into during retirement. For instance, by investing in a taxable brokerage account, and then splitting retirement savings contributions between a tax-deferred IRA or 401(k) and an after-tax Roth account, individuals gain more flexibility in managing their income and taxes in retirement.

Tax-Efficient Investments

Some investments are more tax-efficient than others. For instance, tax-managed funds and exchange-traded funds (ETFs) tend to be more tax-efficient due to lower capital gains tax liabilities. Actively managed funds, on the other hand, tend to generate more capital gains distributions and taxes due to their higher frequency of buying and selling securities. Municipal bonds are also tax-efficient, as the interest income is often exempt from federal taxes and may be exempt from state and local taxes as well.

Timing of Buy and Sell Decisions

The timing of when to buy and sell investments can impact an individual's tax burden. Holding securities for more than 12 months before selling typically results in more favorable long-term capital gains tax rates, compared to short-term capital gains.

Account Selection

Placing investments that generate certain types of taxable distributions within a tax-advantaged account, rather than a taxable account, can help maximize the tax treatment of these accounts. For example, placing tax-free municipal bond income, qualified dividends, and long-term capital gains in taxable accounts, while keeping tax-free income from Roth accounts, can minimize the overall tax burden.

Charitable Giving

Strategic charitable giving can also be a part of tax-efficient investing. Donating appreciated securities, such as long-term appreciated stocks or mutual funds, to a public charity can result in a fair market value deduction and the elimination of capital gains taxes. Additionally, donating non-publicly traded assets with unrealized long-term capital gains can provide similar tax benefits.

Estate Planning

Estate planning considerations can also influence tax-efficient investing strategies. Leaving appreciated securities from taxable accounts to heirs can provide a step-up in cost basis after the original owner's death. Additionally, Roth IRAs are attractive for bequests, as distributions are free from income tax for beneficiaries.

Age difference

When it comes to investing, age plays a crucial role in determining the level of risk that an individual can tolerate. Generally, younger investors can tolerate more risk than older investors. This is because they have a longer time horizon, allowing them to ride out any short-term market volatility and giving their investments more time to grow and recover from potential losses. On the other hand, older investors, especially those nearing retirement, typically have a shorter time horizon and may need to adopt a more conservative investment strategy to preserve their capital.

When spouses have a significant age difference, it may be beneficial for them to consider investing in different funds to align their portfolios with their respective risk tolerances and financial goals. The older spouse may opt for more conservative investments, such as stable, low-earning funds like bonds and money market funds, while the younger spouse can focus on more aggressive investments with higher growth potential, such as stocks or stock funds.

However, it is important to note that investing as a couple is not just about individual needs but also about their collective financial goals. Even with an age difference, spouses can still maintain a unified investment strategy by considering their shared objectives and time horizons. They can pool their resources, maximise tax benefits, and take advantage of employer matches in their retirement accounts. Additionally, they can coordinate their investment choices to ensure proper diversification across their portfolios, rather than duplicating efforts in similar funds.

To summarise, while age difference may be a factor to consider when spouses invest, it should not be the sole determinant of their investment strategies. Spouses can work together to strike a balance between individual risk tolerances and shared financial goals, ultimately strengthening their financial future as a couple.

Frequently asked questions