Originally Aired: August 14, 2015
Topic: The Financial Benefits of Marriage
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
Listen to every episode at our radio show archives page.
Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.
The Financial Benefits of Marriage
James Lange, CPA/Attorney
|Click to hear MP3 of this show|
- Show Topic Introduction: The Financial Benefits of Marriage
- Trusts & Estates
- Optimizing Social Security Benefits
- Getting the Most out of an IRA
- The Few Financial Disadvantages of Marriage
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studio with James Lange, CPA/Attorney, and author of three best-selling books: Retire Secure!, The Roth Revolution and Retire Secure! For Same-Sex Couples. Marriage has myriad benefits in addition to the less tangible factors like love and companionship. For the last year, Jim Lange has been working to quantify the financial advantages of marriage and writing about the findings. Today’s program will explore some calculated perspectives on the value of marriage as we discuss two articles Jim wrote recently for Trusts & Estates magazine, a leading peer-reviewed publication for retirement and estate planning professionals, discussing retirement issues for unmarried couples. One focuses on optimizing Social Security benefits, while the other explains optimizing IRAs and retirement plan distributions. Stay tuned for an interesting and informative hour. So, Jim, let’s start. Can you tell us a little bit about the magazine Trusts & Estates?
Jim Lange: Well, yes. Trusts & Estates magazine is a journal that goes to financial planners, estate attorneys, CPAs, basically high-end planners who are looking for the best information. Whenever you’re in my position, and you have some opinions backed up by quantitative analysis, and you want to prove your assertions, and you want people to believe what you are telling them is actually accurate, the best way to do this is to get something peer reviewed. So, for example, if I was a physician and I had a new way to treat cancer, I would try to do a study, and then, if it worked, I would want the study to be recognized by the profession. I would try to publish an article in the New England Journal of Medicine. The equivalent in the retirement and estate planning world is getting an article published in Trusts & Estates magazine. That way, when I start spewing statistics and how much people can save and things like that, rather than people thinking, “Oh, well, he’s just talking off the top of his head,” or “He might be wrong,” I can now tell people, “You can rely on this information because it is peer reviewed,” and they have their own review process that is, from what I can tell, pretty much in depth, and they actually check the calculations.
David Bear: And a lot of this grew out of research and calculations and numbers you ran for your last book.
Jim Lange: Yeah, that’s right. When I was actually doing the Retire Secure! For Same-Sex Couples, I wanted to quantify the benefits of getting married for same-sex couples. So, basically, the premise for the book was if you are a same-sex couple, and, particularly, if you lived in a state where same-sex couples and same-sex marriages were recognized, you should get married for financial purposes, and I’m mainly talking about older couples where Social Security and estate planning becomes an important element. And when I was trying to, let’s say, gain recognition and publicity for the book, I ended up doing an interview for a website that is associated with Trusts & Estates magazine. They really liked the content, and they asked me to do an article on…now, they didn’t want to just limit it to same-sex couples. They just wanted to do it for unmarried couples. And they asked me to do the article, and I said, “Well, geez, given the amount of space you’re giving me, I can’t do that article. But if you give me enough space to do two articles, I can do that.” One was Social Security, and one was on IRAs and retirement plans. So, those came out within a few months of each other.
David Bear: It was August and November.
Jim Lange: Yeah, August and November. So, the first one was Social Security, and by the way, we got a lot of response from that. A lot of people went to my website and signed up, and it generated a lot of response in the professional community, and again, the article was basically for either same-sex or unmarried couples, and it kind of didn’t differentiate.
David Bear: Unmarried heterosexual couples.
Jim Lange: That’s right, that’s right. So, it’s unmarried, either heterosexual or same-sex couples versus married same-sex or heterosexual couples, and the biggest difference is that today, you can have an unmarried opposite-sex couple get married in all fifty states, but in the same-sex world, there are going to be a lot of states where it is not legal. On the other hand, we are seeing changes…
David Bear: Almost daily, yeah.
Jim Lange: Yeah, it seems that every couple days, one more state is allowing same-sex couples to marry.
David Bear: Umm-hmm.
Jim Lange: So, that’s what this came out of, and what I was hoping to do today is to talk about some of the benefits, and also some of the detriments, of getting married for financial purposes. Now, I’m going to leave the love and the companionship and, let’s say, some of the intangible benefits of marriage, I’m going to leave that for the sociologists and the psychologists and…
David Bear: We’re going to rely on hard numbers here.
Jim Lange: …and I’m going to rely on hard numbers and just try to talk about the financial benefits.
David Bear: Well, do you want to start with the optimizing Social Security benefits part?
Jim Lange: Yeah, why don’t I do that? But this is one of the things that I would say, because I wrestle with this issue. I’m not telling people that don’t have a good, long-term, committed, lifelong relationship to get married for financial purposes. So, I’m not, you know, trying to do a fraud, or trying to, you know, make up marriages that don’t exist. But let’s assume that you are in a long-term committed relationship, presumably for life, and the difference psychologically between being married and not being married is not so enormous that you have to go one way or the other.
David Bear: Umm-hmm.
Jim Lange: So, this information really addresses the people that could go either way, or for people who are interested in getting the most. I think we have a call.
David Bear: We actually have a call. Jon’s calling from Oregon. Hello, Jon?
Jim Lange: Hi Jon. Are you with us?
Jon: I am.
Jim Lange: Welcome to the show.
Jon: Well, thank you.
Jim Lange: Well, I thought maybe if you told us a little bit about your situation and your question, maybe we can be of some service.
Jon: That would be great. My partner and I are in a committed relationship. We are not married. We are strongly committed for the duration. We’re both in our early sixties, and I’m interested in what you were just talking about in the differences in income, given whether we get married or not. She and I both have reasonable incomes. Throughout our lives, we will have a reasonable amount of Social Security, each of us starting soon, and we have a large portion of our assets in a retirement plan or IRAs, and so I’m wondering regarding the fact that we’re not married, it sounds like that might cost us money, and I wonder if you can address that?
Jim Lange: Okay. I’m going to ask you some specific questions, but some things, I think, are confidential, and I’m not comfortable asking you for the radio. So, for example, I’m not going to ask you how much is in your IRAs or retirement plans.
Jon: Okay, good!
Jim Lange: But to give you more specific advice, if you could tell me how old each of you are, or what year you were born, then I can be more specific.
Jon: Yeah. Well, I was born in 1951, so I’m sixty-three. She was born in 1954. She’s sixty.
Jim Lange: Okay. All right, why don’t we take a look at Social Security first? Okay?
Jon: All right.
Jim Lange: All right. Let’s first talk about a basic concept of Social Security: whether you’re married or not. But let’s assume, for discussion’s sake, that you don’t get married.
Jon: All right.
Jim Lange: We almost never want people to take Social Security before age sixty-six. That’s your full retirement age. That is what you would, let’s say, call the full retirement benefit.
Jim Lange: And let’s just take you for a moment. So, if you take your Social Security (and let’s say you’re not married) at sixty-six, and let’s just say that that number is $30,000 (or whatever it might be) per year. You would get that much, plus the cost of living, whatever it is deemed, presumably for the rest of your life. This is just if you’re single. If, on the other hand, you wait until you’re seventy, you would get an eight percent raise every year for every year that you wait between sixty-six and seventy. So, that would be another thirty-two percent plus an additional four years cost of living. So, that’s the basic idea if you are single, and let’s assume that you are not married, and what is your partner’s name?
Jon: Her name is Marie.
Jim Lange: All right. So, let’s say that you aren’t married. I would probably recommend the same thing for Marie. Now, the downside of waiting is if you die young, then the fact that you waited means that there would be less money for you and potentially for Marie, but I think I’m going to show you that by waiting, you’re actually going to end up with a lot more money for Marie. All right, so let’s just go on the basic assumption though that the plan is to wait until sixty-six…
Jim Lange: …all right, for you.
Jim Lange: All right. I’m sorry, to at least start considering at sixty-six.
Jon: Uh-huh. That’s what we’re doing.
Jim Lange: All right. Now, there is a technique called “apply and suspend” that I think will work very well for both of you. So, here’s what it would be. If you didn’t get married, then let’s say you each take a benefit at sixty-six, or you each wait until seventy, then each of your Social Security records would determine how much money you would get, and then you would presumably combine both of them, and that would be money available for the marriage. But let’s say instead…
Jon: The marriage? I think you said if we didn’t get married.
Jim Lange: That’s correct. I’m sorry. For the both of you, assuming that you are combining finances.
Jon: Right, yeah.
Jim Lange: All right, thank you. All right, so let’s say instead, you wait until age sixty-nine. All right? When you’re sixty-nine, Marie will be sixty-six. She will be at her full retirement age.
Jim Lange: Then, you do something called apply and suspend, and this is how this would work: you would apply for Social Security.
Jim Lange: But then, you would suspend. All right, now, this is if you are married. The first case, you know, was just two ships going along with no extra benefits.
Jim Lange: But if you are married, this would entitle you to do this technique called apply and suspend. Then at age sixty-nine, you would apply for Social Security, and then you would suspend collection. So, what does that mean? You wouldn’t get any money, but that would entitle Marie, who would then be sixty-six, she could apply for a spousal benefit. Now, her spousal benefit will be roughly one-half of what your benefit would be. All right? And that pattern for her continues between sixty-six and seventy. So, let’s go back and say that your benefit at age sixty-six was $30,000.
Jim Lange: She would get $15,000 a year between age sixty-six and age seventy. Now, here’s one of the beauties of this: remember I said that you get an eight percent raise for every year that you wait.
Jim Lange: The fact that she is collecting on your record, she still gets the raise on her own record.
Jim Lange: So, really, that’s kind of like four years for free.
Jon: So, is she taking her Social Security at sixty-six while I’ve applied and suspended, so she’s taking her Social Security plus that $15,000?
Jim Lange: No, no. She’s just getting the $15,000.
Jon: And that’s all? Okay.
Jim Lange: And that’s all. So, by the time she’s seventy, let’s say she’s collected four years of Social Security as a spousal benefit.
David Bear: $60,000, yeah.
Jim Lange: All right, $15,000 per year. Now, when she’s seventy, she applies based on her own record. But here’s the thing: on her own record, that will be thirty-two percent higher than it was as if she had never taken a nickel. So, that $60,000 is free, and, in addition, for the rest of her life, she will get thirty-two percent, plus the cost of living, every single year.
Jim Lange: All right. Now, let’s go back to you.
Jon: I’m seventy-three at this point.
Jim Lange: Right, but we missed a step.
Jim Lange: At seventy, you then say, “I want to start collecting.”
Jim Lange: So, you get the full benefit. The fact that Marie took on your benefit doesn’t reduce your benefit at all. You get the entire amount. So, let’s say, when you’re seventy-three, you’re collecting your full benefit, and the fact that you waited until seventy, you’re getting the extra thirty-two percent plus the cost of living. Marie, in the meantime, is getting just as much as if she had never collected a nickel before seventy, which would include basically what she would have received at sixty-six plus thirty-two percent, and then she gets that for the rest of her life.
Now, part of the article, and it doesn’t have your exact situation, but what I did in the article was I compared two couples and they were identically situated, and I actually took the extreme. I said, “Well, both start collecting at sixty-two,” which we don’t recommend, “and they don’t get married.” And the other couple does this apply and suspend at age sixty-six, and the difference, over time, for that couple was two million dollars. Now, the facts that you presented to me, the difference will not be that much, but it will easily be hundreds of thousands and maybe over a million dollars if you live into your nineties. So, the difference is very substantial, and here’s the other thing about optimizing your Social Security benefit. It’s kind of like longevity insurance. You know, some people say, “Oh geez, I want to take the money at sixty-two because I want to make sure that I get it.” Well, if they get it and they die, they’re dead! They don’t have a problem. You don’t fear dying for financial purposes. What you fear is living a long time.
So, this is kind of like the cheapest longevity insurance you could possibly get, and I would say a) I’d like if you don’t get married, I’d probably want you to wait until seventy, but the Social Security home run for you would be to get married, then have you apply and suspend at sixty-nine, Marie collect a spousal benefit at sixty-six, she continues the spousal benefit until she’s seventy, then, when she’s seventy, she collects on her own record that includes the thirty-two percent plus cost of living raises. Then, when you’re seventy, you collect as much as if nobody had ever collected a nickel, and you’re getting, again, the thirty-two percent plus cost of living raises, and that will continue for the rest of your lives, and if you live into your late eighties and nineties, and again, I don’t know off the top of my head how much of a difference it would be for your exact situation, but it’s easily hundreds of thousands, maybe a million, dollars.
Jon: I see. That’s pretty amazing. That’s an artifact of the tax laws, I guess, that this apply and suspend thing is allowable and it can work that way. It sure favors getting married when it comes to finances. I have a question: would it be beneficial…you said something like I could apply and suspend at age sixty-nine, and then take full benefits at seventy. Could I apply and suspend at age sixty-six if I wished to?
Jim Lange: Yes, you could, but here’s the problem with that: when you’re sixty-six, Marie will be at sixty-three, all right? If she starts collecting before she is full retirement age, she gets what’s called an actuarial reduction.
Jon: Okay, yeah.
Jim Lange: And that will hurt her a) for the amount that she can collect on your record, and that will hurt her for when she turns seventy, even collecting on her own record.
Jon: Right, I see. So, the best thing is to do, as you just said, at sixty-nine and sixty-six, and then wait one more year, and then I would be collecting as if I had waited until I was seventy. She’ll start collecting half of my benefit, at age sixty-six then her own at seventy.
Jim Lange: That’s exactly right.
Jon: I see. It’s something to consider.
Jim Lange: All right, now, here’s one thing. Here’s what I don’t want you to do. I don’t want you to say, “Oh gee, we’re going to get all this money when we’re sixty-six and seventy. So, let’s live very frugally now, knowing that we’re going to get a lot more money later.” I would say it’s a better idea to spend at least as much as you would have if you had been collecting so you’re not depriving yourself of anything. It’s kind of like if somebody was going to give you a million dollars and it was guaranteed at age seventy. You could spend some of that money before age seventy knowing that even if you go into your portfolio some, that that money would be restored when you’re seventy. So, this isn’t a “suffer now and live it up later” strategy. A guy named Larry Kotlikoff wrote a book called Spend ‘Til the End, and that was his basic idea, is you do want to do this apply and suspend technique, but that doesn’t mean that you live like a pauper until you actually start collecting.
Jon: You would say that I should take from our other assets what we would otherwise have been getting in Social Security during those years. Is that it?
Jim Lange: That’s exactly right.
Jon: Uh-huh. That’s a little more comforting because I was planning on taking Social Security starting at age sixty-six, and Marie starting to get hers three years later, and in order to have these benefits that come with apply and suspend, you were saying we wouldn’t be getting that money, or I wouldn’t be getting my money at least until I was sixty-nine. But you’re saying during those three years, I should take that…well, you used the number $30,000, out of my other assets and make sure I spend that as a way to insure against, well, dying at seventy-one and being sorry about it.
Jim Lange: That’s right. Now, in your case, dying at seventy-one won’t work out that well. Sorry about that! At least not for you. You mentioned that you and Marie both have good earnings records.
Jon: Pretty good.
Jim Lange: All right. If you had a situation where, let’s say, and let’s use the old sexist paradigm where the guy has a really strong earnings record and the spouse does not, the other benefit of you waiting until seventy is if you die, then Marie would get the higher of her benefit or your benefit. So, let’s say that Marie was a stay-at-home mom, or she didn’t have a strong working record. I would still want you to do everything that I said, but then, when she turns seventy, she can still collect half of yours, which might be higher than her own. And then, if you predecease her, the fact that you waited until seventy to get that higher amount will not only be for your benefit for the rest of your life, but let’s say you do die at seventy-one, and let’s say she hadn’t had a strong earnings record, then she would get that increased amount every year for the rest of her life.
Jon: Well, that’s pretty interesting and pretty good, but I have to tell you my situation. I think our earnings were comparable.
Jim Lange: Okay. All right. So, that’s fine. So, what that would mean is the death benefit wouldn’t be all that important in your particular situation. But, for whatever it is worth, the fact that she gets to increase her record from age sixty-six until seventy, even though she’s collecting $15,000 a year from your record, is going to certainly boost her financial security. So, even if you do die young, she’ll still have the increased amount for her.
Jon: I see. That’s pretty interesting. I‘m taking notes!
Jim Lange: Okay. This has been great, Jon. Would it be possible for us to take a break and then address your IRA questions after the break?
Jon: How long of a break?
David Bear: Two minutes.
Jon: Two minutes? Okay. I’ll be here waiting.
Jim Lange: Okay, we’ll be back to you in two minutes, thanks.
David Bear: And welcome back to The Lange Money our. Listeners, if you’re interested in either of these two articles that Jim’s been talking about, you can call the Lange Financial Group at 521-2732 and they’ll be glad to send you a free copy. Remember to ask for Amanda.
Jim Lange: Jon, are you still with us?
Jon: I am.
Jim Lange: All right, and if you have to roll, I understand, but you’ve been a great guest. Should we talk about your IRA now?
Jon: I would like to do that. I just want to make sure I understand one thing about Social Security.
Jim Lange: Okay.
Jon: All that you talked about, all those benefits that come with apply and suspend, they are just not available unless we get married.
Jim Lange: That’s correct.
Jon: Okay. I wanted to double check that.
Jim Lange: That’s correct.
Jon: Okay. So, yeah, let’s talk about my other retirement assets.
Jim Lange: Okay. Now, I think it’s too personal to ask you how much it’s going to be, but why don’t we use a nice round number like a million dollars?
Jon: Okay, sure.
Jim Lange: Okay? So, let’s assume that you have a million dollars in your IRA.
Jon: Between us?
Jim Lange: No. Let’s just talk about yours.
Jim Lange: All right. If you die tomorrow, is she the primary beneficiary of your IRA and retirement plan?
Jon: Yes, she is.
Jim Lange: Okay. So, you want to provide for her in the event that you die early, or even if you die late, you want to provide so that she is taken care of for the rest of her life.
Jon: As best as possible, yes.
Jim Lange: Okay. All right, so that is, let’s call it, your primary objective. Now, if you both live a long time, at least in the IRA world, while both of you are alive, there are not going to be huge differences between getting married and not getting married. On the other hand, you said you were three years older than Marie, and men typically live seven years less than women. So actuarially, without questions of your health and longevity, etc., it is very possible that Marie will survive you by ten years. So, let’s assume that that does happen, and let’s assume, for discussion’s sake, that at your death, whether it’s at seventy or eighty or tomorrow, for that matter, let’s assume, for discussion’s sake, that the balance in the IRA and retirement plan…when I say IRA, I would include 403(b) and 457 and 401(k) and SEP and KIO, etc.
Jon: Oh, okay.
Jim Lange: All right. So, if you combine all that stuff, that that would be a million dollars. Okay?
Jim Lange: All right. So, let’s take two examples. Number one, you die before you get married, and you leave her your million dollars. Now, she has her own retirement plan. At some point, she will have her own Social Security, and she has some of her own financial resources, and typically, we would recommend that somebody in her position only take money from the amount that she inherits from your IRA only as she either needs it, or the government is going to force her to take it. All right, if she has her own resources, then it doesn’t make sense for her to take money from your IRA earlier than she has to because if she has to take a lot of money from your IRA, and she doesn’t even need it for her spending, then the amount that she withdraws, or has to withdraw, is going to be subject to income tax. So, that will totally and forever reduce the amount of money that she will receive and that she will earn interest, dividends, etc. on. On the other hand, if she can leave that money in a tax-deferred…that is, she’ll eventually have to pay tax on it, but if she can pay taxes later, she will be significantly better off.
Jim Lange: All right.
Jon: And that’s if we’re not married either way.
Jim Lange: All right, right. If you’re not married or married, I basically want her, assuming she can afford it, to take as little from your IRA as possible. Unfortunately for you if you don’t get married, the amount that she will have to take on your death from your IRA is treated much, much differently than if you are married. If you are not married, you know, let’s say you die tomorrow or any time before she is seventy. She will be forced to take distributions and pay tax on it, even though she might not need the money.
Jon: Oh, I see. Even before she turns seventy, she’s forced to take money and pay tax?
Jim Lange: That’s correct. This is if you don’t get married.
Jim Lange: All right. And the way you would calculate how much she has to take is you would calculate her life expectancy, which would be found in Publication 590, and it would, let’s say, be a life expectancy of twenty-eight years. So, she would take twenty-eight, divide it into the balance, and that’s how much she has to pay tax on. Next year, it would be twenty-seven divided into the balance. That’s how much she has to pay tax on. The year after that, twenty-six divided into the balance. That’s how much she has to pay tax on, etc. That’s current law if you’re not married.
Jon: Okay. I didn’t know that. That’s a lot of tax.
Jim Lange: That’s a lot of tax. Now, it gets worse. There’s pending legislation that is supported both by Obama and the Republican Congress and, we believe, the Senate. And if this legislation passes, she will have to pay income tax on the entire IRA that is distributed to her within five years of your death.
David Bear: Because she’s not a spouse.
Jim Lange: That’s right, because she isn’t a spouse. So, this new law would only apply to non-spouses. So, let’s say you died with a million dollars in your IRA, or your 403(b), etc. If this law passes, and we think it’s a much better than fifty percent chance that it will, and very likely before your death, she’s going to have to pay income tax on a million dollars within five years of your death.
Jim Lange: So, that’s going to push her into, you know, probably the highest brackets. Even if we try to spread it out, it’s still going to be a couple hundred thousand dollars a year. She’s going to probably have to pay roughly $400,000 in income taxes, and then the amount that is left, that $600,000, the earnings and dividends and capital gains on that is going to be subject to income tax every year.
Jon: I can’t believe the Republicans would allow this.
Jim Lange: Well, I happen to think it’s a terrible idea because this is hurting the middle class guy. This is hurting the guy that has a couple hundred thousand or maybe a million or two million in their IRA. It’s not hurting the guy that has a hundred million and has a small IRA. This is hurting the middle and upper-middle class guy who has worked hard. I mean, if you have a million dollars in your retirement plan, you obviously worked hard and saved regularly, and you want to provide for your family after you’re gone.
Jon: Right. Well, yeah, it just seems like you’re paying taxes twice, what you just described.
Jim Lange: And worse, you’re paying it quickly.
Jim Lange: All right. Now, let’s take that same scenario, but let’s say that you got married and then you died.
Jim Lange: All right. If you got married and you died and you left her the million dollars and you died before she was age seventy, what she could do is, she could take that million dollars and roll it into her IRA. And that would be treated the exact same as if it was her IRA. And what that would mean is she wouldn’t have to take out a nickel until she’s seventy.
Jim Lange: Then, when she’s seventy, she would have to take distributions, but instead of having, let’s say, a factor of sixteen, which might be her life expectancy at age seventy, because it is a marital IRA and it’s rolled into her IRA, her factor would be twenty-six. So, she would have to take less than four percent, where if you weren’t married, she would have to take a much higher number.
David Bear: All in five years.
Jim Lange: Well, all in five years if that law passes, but even if that law passes, if she is married, she will then be protected. So, this will be enormous. Now, again, I don’t have the exact numbers for your situation, but here’s the numbers in the article that shows the difference between if you don’t get married and if you do get married under current law, and this would be the difference to her. And the difference, believe it or not, over her lifetime, would be two million dollars, leaving a million dollar IRA.
Jim Lange: Yeah. So, the difference is just enormous. And again, see, that’s one of the reasons, getting back to the beginning of the show, that’s one of the reasons I wanted to have this peer reviewed because if I’m you, I’m thinking, “Well, who the hell is Jim Lange, and how do I know that these numbers are right?”
Jim Lange: All right.
Jon: Well, I was wondering, not about you, but about…this sounds almost too, it just sounds amazing, the difference between being married and not married, and this is if I have a million dollars in assets, and…when you said there’s a two million dollar difference, do you mean if I die very early?
Jim Lange: Yeah. That’s assuming that you’re dying early.
Jon: And if we die around the same time, I guess it doesn’t make that much difference at all.
Jim Lange: Well, all right, so let’s take that example that you either die at the same time or, either one, that you die, you leave your money to Marie, and then she leaves it to…and who is her beneficiary?
Jon: She has children.
Jim Lange: All right. So, let’s assume that she wants to leave that money to her children. Okay? And there’s two possible ways to do it. One, you get married, she rolls the money into her IRA, and then, at her death, she leaves that money to her children. That is treated significantly differently than if you don’t get married, you die, she takes that money as an inherited IRA, even under the current law where she can take it out slowly, when she dies, then her kids are going to have to take it out very quickly.
Jon: If we’re not married?
Jim Lange: If you’re not married. If you are married, then her kids will be able to take it out much more slowly. Now, if I go back to that article again, the difference between…let’s say this is her kids’ situation. So, I have married parents versus unmarried parents, and if her kids live into their eighties, the difference on that…now, this is astounding, is actually…I can’t even believe it myself, but it’s true, it is over a five million dollars difference to her kids.
Jon: I’m writing down what you’re saying because it’s almost unbelievable.
Jim Lange: Right.
Jon: How many million did you say?
Jim Lange: It’s going to be a difference of over five million dollars with current law.
Jon: Okay, okay.
Jim Lange: All right. Now, under the proposed law, if that passes, then we’re probably looking at a difference of about two million.
Jon: I see.
Jim Lange: All right. Now, by the way, at the risk of sounding self-serving for a moment, David did offer anybody that wants can get a hold of either the links, or if you’re not really an internet-type person, we will send you hard copies of these articles. So, if you were to call Amanda at (412) 521-2732, she will send you all this information.
Jon: And you’re just giving that away for free, just like this radio show?
Jim Lange: I am. Yeah, that’s right. And, you know, we do have a national following, and interestingly enough, we get more calls from outside Pittsburgh than Pittsburgh, even though it airs locally. It also airs on the internet. But yeah, that offer would go to anybody.
Jon: Well, that’s how I got this number, over the internet, and I see where it says there’s links to the articles. So, I can get those that way. I really appreciate this! I’m going to look into those articles and Marie and I have some talking to do, don’t we?
David Bear: Do we have wedding bells in the future here?
Jim Lange: Well, again, I’m going to get back to the issue. You said Marie is your life-long committed partner. It’s not like she’s your buddy that you see on the weekends.
Jon: That’s right!
Jim Lange: So, my thinking is, why would she not want to have this financial security for herself, and if she is concerned about her kids (and who today isn’t), why would she not want to take advantage of, again, a ton of money. Now, you might not have a million dollars. You might have a half a million dollars, in which case, the numbers and the advantages that I told you would just have to be cut in half. But whatever you have, it still is very, very substantial. That is the difference.
Jon: I sure appreciate all this information and all the time that you’ve spent with me. I will do some further reading. So, thanks very much for your time.
Jim Lange: Well, normally, we have a guest on this show, and we didn’t have one today, and so you have, in effect, been that guest and I thank you for your time.
Jon: Okay, well, good luck to you.
Jim Lange: All right. Thanks again, Jon.
David Bear: Jim, in helping Jon through his situation, you were talking about all the advantages of being married. Are there any disadvantages?
Jim Lange: Well, sure. I mean, obviously, Jon has a unique set of facts and circumstances like we all do. Also, Jon and his partner are in their sixties. For a younger couple, Social Security is not really a factor in their short-term planning. Estate planning might not be as important to them. So, then, you have to look at some of the other advantages and disadvantages. So, for example, depending on their situation, there can be an income tax bonus, if you will, or an income tax penalty. There’s a famous marriage penalty that typically is when you have two people earning roughly the same amount of money, the taxes and the income taxes on being married could be higher than if they stayed single. So for younger people with roughly equal earnings records, it might not be so good to get married.
Another situation that we ran into in practice is under Obamacare, you can get some pretty cheap health insurance if your income is low. So, let’s say you have a low income. Let’s say your partner has a high income. If you are single, you will qualify for pretty cheap health insurance based on your income. If, on the other hand, you are married, they will combine your income with your spouse’s income, and then you’ll find that the cost of your health insurance goes up substantially. Now, depending on your age and how important that is, that’s pretty tricky. So, for example, we have one couple, and the plan there is to get married when the financially dependent spouse is sixty-five and will qualify for Medicare, but before sixty-five, they are not going to get married so he can qualify for the lowest insurance rate. And assuming that his spouse doesn’t die before then, it’s going to work out.
David Bear: Umm-hmm.
Jim Lange: Now, the spouse, in that case, actually does have a big IRA, and if he does die before then, then it’s not going to work out. So, you sometimes have to look at each situation, but, frankly, my typical audience, I’m usually not doing work for people in their thirties where estate planning is not really an important consideration. Typically, I’m in front of people in their sixties and older where Social Security is important and also estate planning is important.
One other thing I will mention about the Social Security: again, the analysis that I did is peer reviewed, but, in addition, we’ve actually had four radio shows on Social Security, we’ve had Jane Bryant Quinn, who is just a wonderful financial wizard, and we’ve had Mary Beth Franklin, and we had Kathleen Sindell, and then we had Larry Kotlikoff. From what I can tell, and from those shows, I think that they would agree with just about everything that we have said today, and actually, Jane Bryant Quinn looks at it as a women’s issue. She thinks if the man takes Social Security…well, I’m being sexist again, but if she thinks that the spouse with the higher earnings record (let’s assume it’s the man) takes Social Security at sixty-two, and then he dies, and his wife is doomed to have a lower record and a lower Social Security benefit for the rest of her life, that he is really doing her a great disservice by taking Social Security. Now, the last caller, Jon, I really want him to get married because a) they will have more money together if they get married and he takes my advice and does the apply and suspend, but b) if he dies early, there will be additional monies for her. Now, the extreme would be is if she didn’t have a strong earnings record herself. Then, he is actually providing, in effect, significant financial security for her. But if you go back to the disadvantages, the other thing that I do have to admit, another disadvantage is there is some potential liability with long-term care. So, certain assets that you might have that would be protected in the event that your partner needed care…
David Bear: If you were single.
Jim Lange: …if you were single, and they would not force you to pay it, would not be protected if you were married. On the other hand, if you’re talking about your lifetime partner, and your partner needs care, I personally don’t want your partner to be a ward of the state, and I would rather have either that covered with insurance (and I’m not necessarily a great fan of long-term care insurance), but I do think that the significant advantages in most cases, particularly when you’re older and there’s some money involved, and the older you are, probably the more money that’s involved, the greater the benefits are. In general, being married is a great thing for financial purposes. And that doesn’t even include the issues of, you know, one house instead of two, travelling together on vacations, reduced food costs…
David Bear: Making medical decisions…
Jim Lange: …medical decisions, and all that stuff.
David Bear: Right.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.