Is your current investment strategy designed to make your retirement as tax efficient as possible? Understanding how tax works when you’re retired is only ONE of the factors to consider when structuring your investments in a marriage.

Because we have NO idea what will happen when we’re 90 – what money we will need, what the tax rates will be, which one of us will be alive, structuring your money for flexibility is the most important thing. In today’s episode I explain the reasons you should think carefully about who owns which investment in a marriage.

Please do share this episode with your married friends, and their husbands, as they may be young enough to change their investment strategy so their retirement is a lot more tax efficient.

Show Notes

• [1.57] Tax 

• [03.54] Tax while you’re working

• [06.33] When protection from creditors is an issue

  • Inheritance

• [09.08] Tax while you’re retired

• [10.51] Capital

• [12.21] It’s all about flexibility
  

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Optimising tax on your investments

The decision tree you need to choose your investment

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Why you should invest offshore

Why your home is NOT an investment

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Quotes

“Retirement funds have a lot of great benefits, and normal investments have a lot more flexibility.  So you need to have both.” – Lisa Linfield

"When you’re retired, you still pay tax." – Lisa Linfield

"Most people think that the only way to save for retirement is in a retirement fund. It’s not." – Lisa Linfield

Script:

184 – Why the way you’re married changes EVERYTHING!

Hello everyone and welcome to today’s episode of Working Women’s Wealth.  I’m Lisa Linfield and I’m building a community of Women who are committed to the journey of living Financially Free lives – so that we can have the money that enables us to CHOOSE – IF we want to work, where we work, and when, so that we can follow our dreams.

I want to tell you that the way you structure your assets in a marriage is an unbelievably important exercise – especially when it comes to how much tax you pay now and in retirement.  But there are so many other reasons you should think carefully about who owns which investment.

Last week’s episode – 183 – is the foundation, as the way you are married (either in Community of Property or an Anti-Nuptial Contract) is the first thing to consider.

Tax

But let’s start with two little base concepts about income tax.

1.       Tax is done at an individual level… and in most countries, the more you earn, the higher you are taxed.  Think of it like filling a bucket up with water.  The bucket has different notches engraved into it, a bit like a measuring jug for cooking.  As you pour the income into the bucket of water, the first portion gets taxed at the lowest rate – the next portion a little higher, the third portion higher … and so it goes until you end up at the highest tax rate.

So, each incremental piece of income you earn takes on a higher and higher tax rate.

2.       Now tax is something you will always pay.  Either you pay it now or you pay it later.  Most times you pay it now, as you earn – but with retirement funds or IRAs, you pay it when you draw that money as income… when you’re retired and need every cent of that money, and don’t want to be paying 45% of it away to the government.

It’s one of the biggest mistakes I see retired people making – they think they have 1,000,000 to spend, and do their retirement calculations on that, but they actually have 1,000,000 minus the tax they will pay – leaving them with a big gap to what they need or want.

So making sure you have the lowest legal tax rate is so important.

Tax while you’re working

In most couples, one partner earns more than the other.

So let’s say Mary is the primary breadwinner and she earns 1000 in a fictitious place called La-La-Land.  Her tax rate is 30%.  And Jo is her husband, self-employed, and he steadily earns 500 with no real chance of it growing more– his tax rate is 20%.

Now Mary, as she’s employed by a company that requires her to, contributes to a pension fund.

Because they live frugally, they have saved up enough money to buy a rental flat.

So whose name should they put it in?

Now, because you listened to last week’s episode, I know you’re going to say “depends how they’re married”.  Well, let’s say Ante Nuptial Contract, but with Accrual – meaning that everything accrued during the course of the marriage would be split 50:50 if they divorced or died.  So there was no need to keep the house in Mary’s name even though it’s her money that was saved for the house. 

A rental property earns income, and income is taxed at income tax rates.  So, if they earned 100 of income in a year, and it was in Mary’s name, it would be taxed at 30%.  So they would pay 30 of the 100 rental income to the tax man.

But, if they put it in Jo’s name, the 100 would only be taxed at 20%, so they would only pay 20 in tax, and have 10 more to spend as a family. So, the answer is they should put it in Jo’s name. 

So often I see investments staying in the name of the person who earns the money, meaning as a family they’re worse off because they’re taxed more.  In my book, Deep Grooves, I talk about good reasons and real reasons, and the real reason is a perception of control.  If it stays in my name then I control the money. Especially in case there is a divorce.

In reality, if you’re married in Community of Property or ANC with Accrual (or 50:50), that’s an illusion of control because in the end at death or divorce, it’s both of your money.

When protection from creditors is an issue

Now let’s say Jo’s business is not steady state and actually in the startup phase, and it has great potential for success.  But, his business is going to need to borrow money at some stage, and this leads to a potential for something going wrong and all that money being lost.

If that happens, the people he owes money to, or his creditors, can come and take the rental property if it’s in his name.  So it may be better to put it in Mary’s name even if they will pay higher tax – because if he does go bankrupt and the creditors come, they can’t take anything in Mary’s name (because they are married with an Ante Nuptial Contract).

If they were married in Community of Property, it doesn’t matter who owns it, the creditors can get it… and you would put it in Jo’s name to reduce the tax.

Inheritance

There is one time however when anyone is protected, regardless of how you’re married, and that’s inheritance when the person who left you the money explicitly stated in their will that that money would remain free of any community of property.

It’s so important that you check that your will and the will of those you love specifically have this clause.

If it’s there, then make sure that whomever inherits that money keeps it in their name ALWAYS and it’s invested in assets ALWAYS and not used for expenses.  That way it will be excluded from death, divorce and creditors of your partner.  And keep a paper trail that can prove from the will, to the receipt of the asset, to any further buys and sells, that that money is clearly distinct and as a direct result of the inheritance.

Tax while you’re retired

Understanding how tax works when you’re retired is so important because it’s where so many people – especially those that self-invest make a mistake.

When you’re retired, you still pay tax.

I know, it actually comes as a shock to most people – who think their days of paying tax finish when they stop working.

So let’s take Mary and Jo, and let’s take our first scenario, where Mary puts most of her money in the company’s retirement fund, and Jo has the rental house in his name.

When Mary draws money from her retirement fund, she’s going to pay tax on that money according to income tax rates – just like she would if she was employed.  So if she drew down 1000, then she would be taxed at 30%.  If Jo is now retired, he will have his rental income at 100 only.

And this is where one of the big problems about tax in retirement comes… that because some people put all their money into one of the couple’s retirement funds, they continue to be taxed at very high tax rates.

It’s why I recommend that you don’t max out the retirement fund allocation of one of you… unless you get a free match from your company.  Other than that, if Mary had more money, and she wanted to put it into a retirement fund, she should have put it into a retirement fund in Jo’s name.  That way, if they need 1,000 they could take 500 from her retirement fund, paying only 20% tax, and 500 from Jo’s, paying only 20% tax. 

Remember, each of them are taxed as individuals, and if the bucket isn’t as full, then you aren’t paying as much tax.  So between them, they would have 100 more to spend.

Capital

Most people think that the only way to save for retirement is in a retirement fund.

It’s not.

You can invest the same money in a retirement fund as you can in a mutual fund or unit trust… just without the tax and restrictions if you aren’t someone who’s tempted to spend it.

The reason why it’s so important that you know this is that you only get taxed on the growth or gain in value of the money.  And, in most countries, the capital gains tax is way less than income tax.

In South Africa for example, the income tax rate goes from 0% to 45%, but capital gains tax goes from 0% to 18%.  In the US, it’s 0-37% for income tax, and 0-20% for capital gains tax.  In the UK, it’s 0-45% and the maximum CGT is 20%

Now, if all those percentages make your mind close up, just know that you’ll pay a lot less tax if you take 1000 from capital (or normal investments) than if you take 1000 from retirement funds.

But, it’s not an either / or situation… it’s a both.  Retirement funds have a lot of great benefits, and normal investments have a lot more flexibility.  So have both.

It’s all about flexibility

Because we have NO idea what will happen when we’re 90 – what money we will need, what the tax rates will be, which one of us will be alive, structuring your money for flexibility is the most important thing, and it has many other great side effects.

So if you’re married, you need to think of four buckets you need to fill equally.  Two in your name, two in your partner’s name.  You both need money in retirement funds (if both of you are working) and you both need money in capital, or non-retirement funds.

That way you will have the flexibility you need to shift and change strategies in your 30 years of retirement as the tax rates and needs of both of you change.

Friends, I see so many people at retirement with one partner with all the money in their name, and all the money in only retirement funds as they leave corporate.  It’s a huge challenge to provide the planning flexibility they need through their retirement.

So please do share this episode with your married friends, and their husbands, as they may be young enough to change their investment strategy so their retirement is a lot more tax efficient.

I’m Lisa Linfield, and this is WWW.