If you and your spouse or partner both have access to a 401(k) or other employer retirement plan, you might be wondering how you should divvy up your contributions between the two of them.
This can be an especially difficult and emotionally-laden question if one of those 401(k)s is measurably better than the other, in which case it may make rational sense to contribute more money to that 401(k) even if it would leave the other spouse or partner with less money saved for retirement.
So, what should you do in that situation? Should you split your contributions evenly, even if it means putting money into a bad 401(k)? Or should you contribute more to the better 401(k) even if it means that one of you will have more money than the other?
Let’s break it down.
What Makes for a Good 401(k)?
Before getting into the details of what you should do, it’s important to define what’s meant by a “good” 401(k). Without that definition, it’s impossible to even know whether one 401(k) is better than any other.
First and foremost, a good 401(k) is defined by a good employer match. And the experts I spoke to agreed that taking full advantage of any match you receive is almost always worth it.
“You want to make sure you get all of the free money from those matches even if it means different contribution rates,” said Lucas Casarez, CFP®, owner of Level Up Financial Planning. “A 100% match on contributions easily outweighs investments with slightly higher investment expenses.”
Along with looking at each 401(k)’s match, Casarez said that it’s also important to understand how those employer contributions vest over time.
“Some employers’ matches are 100% vested immediately, some occur over time,” he said. “The faster the vesting schedule, the higher the probability that you will retain the full employer match.”
Another important factor to consider is cost. Lower costs generally lead to better returns, so prioritizing whichever 401(k) allows you to minimize costs may be a good idea.
“Expenses charged by the plan can be a major drag on returns,” said Jeff Burke, CEO of 7 Street Financial. “Even small fees can add up over time.”
Of course, the investment options offered by each 401(k) are also an important factor. Nicolas Stanley, CFP®, founder of Protogè Wealth Planning, pointed out that some 401(k)s have a relatively limited set of investment options while others allow you to choose from among thousands of mutual funds in a self-directed portfolio, which may make it easier for you to implement your desired strategy in a cost-effective way.
The ability to make Roth contributions could also be a big factor, depending on your specific circumstances.
“While it’s not right for everyone, the tax advantages of Roth contributions are quite powerful,” said Ian Bloom, founder of Open World Financial Life Planning. “Potentially tax-advantaged savings with tax-free money in retirement? Having access to that is a big deal.”
To sum up, the major factors to consider when evaluating whether one 401(k) is better than another are:
- The employer match
- The vesting schedule on that match
- Plan and investment fees
- Investment options
- Availability of Roth contributions
Is There Risk in Contributing More to One Partner’s 401(k)?
The obvious concern with the idea of contributing more to one spouse’s or partner’s 401(k) is that it would leave the other without as much money saved for retirement, which would potentially leave him or her at risk if the two of you were ever to split up.
But according to the experts, that concern can be alleviated by the fact that there is legal recourse to even out those funds in a divorce proceeding.
“In every state, funds accumulated during the marriage are considered marital property regardless of the name on the account,” said Leah Hadley, a Certified Divorce Financial Analyst (CDFA) with Great Lakes Investment Management. “In a community property state, those funds are divided equally. In other states, the funds may still be divided, but that division is negotiated as part of the divorce settlement.”
Hadley said that if funds need to be moved from one person’s 401(k) in order to even out assets in a divorce proceeding, a Qualified Domestic Relations Order (QDRO) would be filed that would allow that to happen without penalties or tax consequences.
Still, Hadley did warn that there is some risk involved, even with those protections in place.
“Because 401(k)s are only in one person’s name, they are the only one who can request money from the account,” she said. “I have seen some divorce cases where one of the parties leaves the other party with no access to funds. While there is legal recourse, it takes time.”
There is also more risk involved if you aren’t married, as there isn’t a formal divorce proceeding that exists to ensure an equitable division of money.
“If you are not married, things get a little more hairy,” said Bloom. “There’s not necessarily a way for one partner in the relationship to get access to the other partner’s retirement funds. I would not recommend contributing more to one partner’s 401(k) if this is the case. Splitting up can be emotional enough without worrying about your financial future.”
Deciding Whether to Contribute More Money to One Spouse’s 401(k)
There’s one thing that all the financial planners I spoke to agreed on: It’s almost always worth maxing out every employer match available to you, even if it means contributing more money to one 401(k) than another. But even then, they recommended trying to even things out with additional contributions if possible.
“The only scenario in which I would recommend investing in one spouse’s employer-sponsored 401(k) plan over another is if one spouse’s plan has an employer match while the other spouse’s plan doesn’t,” said Ryan Firth, CPA, founder of Mercer Street. “But once that match has been reached, I’d recommend allocating remaining contributions so as to make the total contribution to each account equal.”
Chris Jackson, CFP®, founder of Lionshare Partners, adds that the specific considerations may change depending on where you are in life.
“For younger couples, the focus should be on maximum contribution including employer match,” he said. “Older couples, with larger balances, should focus on keeping the cost down, because an extra 1% on funds for a million dollar account is an extra $10,000 a year in fees.”
Beyond that, it’s important to start with your personal investment plan and what’s important to you. Minimizing fees should always be a priority, as should being able to match your target asset allocation. And depending on your situation, the ability to make Roth contributions may be important as well.
And at the end of the day, while it would be ideal for each of you to have the exact same amount of money in your retirement accounts, it’s helpful to remember that contributing more money to one spouse’s 401(k) doesn’t necessarily leave the other one at risk. Divorce proceedings are designed in part to help even out assets, and there are mechanisms in place that allow you to move money from one spouse’s retirement account to the other.
In other words, if there’s a big difference in 401(k) quality, you shouldn’t be too concerned about contributing more to that 401(k). Doing so is likely to put your family in a better financial situation no matter what.
Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.
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