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Podcast Episode: How Spouses Can Use Retirement Savings to Reduce Their Taxes

How Spouses Can Use Retirement Savings to Reduce Their Taxes

Each week, Dr. Bruce Ross, Christian Sherrill, and Brian Page host national experts who share winning ideas to manage money and the home as a team.

For our latest episode we welcome Sean Mullaney who is the President of Mullaney Financial & Tax, Inc. Through Mullaney Financial & Tax, Sean provides advice-only financial planning for a flat fee. Sean writes the Plutus Award winning blog on the intersection of tax and financial independence and has been quoted in media outlets including The Wall Street Journal, The New York Times, and MarketWatch.

We discuss how spouses can use retirement savings to reduce their taxes.

🔔 Click here to listen and subscribe to the Modern Husbands Podcast on Apple.

🔔 Click here to listen and subscribe to the Modern Husbands Podcast on Spotify.



Questions Answered

0:00:00 Introduction

0:01:00 How does a traditional 401k reduce an investors tax burden when investing?

0:05:48 What is the difference between a traditional IRA or 401k and an IRA? And what are the differences between a Roth 401k, Roth IRA, and Spousal IRA? What is a spousal IRA?

0:14:04 What are some of the misconceptions around some investing option terms?

0:16:32 Why would someone choose to invest in some sort of IRA rather than a traditional tax shelter where the investor receives a tax deduction when they contribute?

0:23:23 How can it help parents who don't work outside of the home?

0:26:04 Should people contribute to traditional retirement accounts or Roth retirement accounts?

0:28:57 One simple piece of advice based on the conversation

0:30:12 Where listeners can learn more from Sean about tax tips.

Additional Resources

Podcast Transcript

Welcome to the Modern Husbands podcast, where any combination of Doctor Bruce Ross, Christian Sherrill and Brian Page host national experts who share winning ideas to manage money and the home as a team.

Today we welcome Sean Mulaney, who is the president of Mulaney Financial and tax Incorporated.

Through Mulaney financial and tax, Sean provides advice only financial planning for a flat fee. Sean writes the Plutus award winning blog,on the intersection of tax and financial independence, and has been quoted in media outlets including the Wall Street Journal, the New York Times and Market Watch.

Today we will discuss how spouses can use retirement savings to reduce their taxes. Enjoy the show.

Sean, really appreciate you taking the time to join us today and help our listeners understand how spouses

can use retirement savings to reduce their taxes.

Brian Bruce, so grateful to be here. Thanks so much for having me.

Let's start with some of the fundamentals about retirement savings and taxation.

How does a just traditional 401K reduce an investor's tax burden when investing for retirement?

Great question, Brian. Right. So the idea behind the traditional 401K is at work. You can defer some of your income into, they call it a 401K account. And what that does is it delays the taxation of that amount. So up front you're getting a significant benefit in order to build up retirement savings. So, you know, you put $10,000, say, into a, you're working and say your marginal, the last tax bracket you pay into, say, the 22% bracket, and

you put $10,000 in this year, you save $2,200 in federal income taxes this year.

That's an upfront benefit. So it's a real great incentive to save for the future. And it helps you today, at least a little bit today because you're getting that big tax benefit today.

Then two other things happen when we have money in a traditional four hundred one k. The first thing is what I

refer to as tax deferred growth. So hopefully that money will grow tax deferred over many years. You're working, you don't access that money. That money just sits there and it grows. And that money is not taxed while it's growing, while you're still working, and you're not taking it out.

So that's a second significant tax benefit and then a third tax benefit is a little more subtle. It's this in retirement, when you start taking the money out to fund your living expenses, you go back up the progressive tax brackets. Right? Recall, in this country, not everybody's taxed at the same rate.

Not everybody's just taxed at, oh, 37%. No. What happens is your income goes up a ladder of tax brackets, the standard deduction.For some people, it's itemized deductions, but not too many standard deduction. Then the 10% bracket, then the 12% bracket. So even in retirement, when you start living off this money and it is taxed, it may be that it's not that heavily taxed because you start against the 10% bracket first and then the 12% bracket and so on and so forth. 

So those are, to my mind, the three main tax benefits of saving and investing through a traditional 401K.

Boy, I taught for years, and I have never considered explaining that process in the way you did, which is brilliant.

I love the fact that rather than starting with the 10% tax bracket you started with for what would be for most people the standard deduction, because 40% to 50% of the country does not pay federal income tax because

their income does not exceed their deductions when filing.

That is a really important explanation. Thanks for being so specific.

And Brian, I will say it will vary person to person. Sure.

Now there are going to be plenty of people in the audience who retire before collecting Social Security.

And for those people, the standard deduction is vital. Right. So when you start taking Social Security, that Social Security may go, go against the standard deduction. It may not, by the way. Right. That's a whole other conversation. That's a separate podcast episode.

But say you're not taking Social Security either because you're not age 62 yet, or you decide to take Social Security after age 62, but you're retired. So maybe you're 66 or 68. You're retired, you're not taking Social Security, you start withdrawing against the 401K.

Well, that first dollar is going against the standard deduction pretty much in most cases, and that'll be subject to a 0% tax. Sometimes I refer to that as the hidden Roth IRA.

We'll come and we'll discuss that a little bit more later. But I see, okay, we're taking money out of a 401K.

It's a traditional 401K, but it's taxed against the standard deduction that is at a 0% rate.

Wait a minute, I've seen that before. We take money from a retirement account, we don't pay tax on that. Isn't that a Roth IRA? I colloquially refer to that as a hidden Roth Ira that sort of lurks inside many people's traditional 401 ks. So, yeah, I think the traditional 401K is just a great way when we're in the accumulation phase, I think we should be thinking about, hey, this is a great way to build up tax advantage wealth.

Take some tax deductions today and on the out end, on the retirement end, yes, it'll be subject

to tax, but it may be a relatively light tax, so we shouldn't fear taxation in retirement.

Sean, that's just so, well, concisely, succinctly put. I love how you just like, you can go through, like, these are the main three benefits because I think there's a lot like our listeners and

just the average american doesn't know. And kind of, speaking of which, I mean, we're talking about these fundamentals.

We've been throwing out these terms of traditional 401K. Traditional IRA. Roth Ira. Can we kind of take a step back and say, like, what's the difference between a traditional IrA, a Roth Ira, a even, I guess, a Roth 401K. 

Yeah. So to my mind, this is a two, it's a two dimensional axis. Right. So we have the traditional versus Roth distinction, and then we have what I refer to as the home versus work distinction.

Traditional versus Roth is sort of the technical language. Right. The traditional retirement account is I get a deduction upfront and then I'm taxed on the back end.

And that has traditionally been the defined contribution. When I say defined contribution, what I mean

is you and or your employer contribute to the retirement account and it's not taxed today.

That started, for the most part in the seventies in this country, and it's really sort of become the model that most Americans have. Right. You take a deduction upfront and you don't pay tax today, and the hope is in retirement you're probably gonna pay less tax. And that tends to be what happens for most retirees. So that's the traditional, whether it's 401K or IRA, whatever it is. Okay.

But then in the late nineties, they introduced the concept of the so called Roth Ira, which is the exact flip. Right.

What we're doing with the Roth IRA is we're not getting any tax deduction on the way in, but on the way

out, the distributions in retirement are entirely tax free. Right. And we have to play by some rules. They're not that onerous. 

But yeah, we have to play by some rules. We can't just take the money out next year and say it's all tax free, but for the most part. Right. That's the model is no tax deduction on the way in, tax free growth, and then tax free treatment on the way out. So that's that traditional versus Roth dimension.

And by the way, right. Let's not get too hung up over, oh, should I do all traditional? Should I do all Roth? I will say this. It's a really good thing to have money in a tax advantage retirement account, whatever it is. Right. Traditional and or Roth.

And many Americans will benefit from maybe having at least a little in both. And I will say most Americans will benefit from having a lot in the sum total of those. Okay, so that's the first thing is the main thing there is you got to be putting money into one of these. At least one of these. Yes.

And it may be that you could do two, not as much, all the differences, but at least putting in one of them, at least one of them. I think for most Americans and most folks in the audience, that's the right answer.

You know, look, there are going to be some people who have a trust fund, some people who are star NFL quarterbacks, right? There are outliers. Hopefully maybe some of them are in the audience. But for most folks, if you can't throw for 4000 yards in the NFL, you probably need to be funding one or more of these retirement accounts to some degree. Okay, great. Now there's the home versus work distinction. That's what I call it. 

That's just my own colloquialism, right?

When I say home, I mean an individual retirement account.All that means is that you have a pulse and you have earned income. If you have both those things, you can contribute to an individual retirement account that's at home. You pick the financial institution, you go on an Internet portal and make the contributions, you choose the investments, right? It's individualized. And like I said, all you need is a pulse and some sort of earned income to do that. And those are the traditional Ira, the Roth ira.

There's an annual limit for 2024. That limit is now. I gotta double check my own thinking. $7,000. It's $8,000.

If we're 50 or older, they change limits from time to time. So people like me keep getting confused.

But that's okay. So that's the home. Now, what about work? Work can have different names. The most frequently named name is a 401K, but it could be a 403 b, it could be a 457.

There are other ones out there. But let's just think about a 401k. What are the requirements of a 401k? You have to have a pulse and you have to have earned income from that employer. Right?

So you can't say, oh, well, you know, I have this part time job, I made $5,000. They have a have this other job where I made $100,000. So I'm going to max out at 23,000 in the $5,000. Employer's 401k doesn't work that way. Right. You have to have earned income from that particular employer to contribute to that particular employer's four hundred one k.

One of the big advantages of the workplace retirement accounts is they often offer employer contributions.So we ourselves might be able to contribute and then our employer might make some sort of contribution on our behalf. When we combine those two and we make sure we capture as much of the employer contribution as possible. That could be a real accelerator in terms of growing our own wealth. 

I have been explained. It's been explained to me that a Roth. Four hundred one k. The visual of it looks like a couple of buckets. And so one bucket is what the employee is contributing. And in that instance, because it's a

Roth, there's not a tax benefit. When you contribute, it grows tax free. And as long as the withdrawals are qualified, you pull it out tax free. That bucket is for the employee, and then the employer match goes into another bucket.

But when you use money from the employer match bucket upon retirement, you'll be taxed on those dollars. Is that correct, Brian? That was 100% correct until December of 2022, when Congress passed secure 2.0. Really? We don't have to get. We don't have to get, Brian, so. And by the way, in practice, I believe, Brian, now you're 99.5% correct.

So what Brian's alluding to is the distinction between employee contributions and employer contributions. My experience. Look, I'm one man, but in my travels, what I'm finding is more and more 401K programs are

offering employees the ability to do either a traditional or a Roth contribution as the employee. And in fact, most say you could just. You could do some of a and some of b. Right. Some traditional sum Roth. That seems to be where the marketplace is going in terms of most employers.

But then there's this question of, well, okay, there's a match at work, right? Or maybe it's not even a match. It might be a non discretionary employer contribution. Could be a combination of those two things where the employer's making the contribution. Up until December of 2022, the law said, all right, that's just a traditional contribution. It's tax deferred. It's exactly what you were saying, Brian.

But then in December of 2022, Congress passed secure 2.0, and that says, hey, employers, you're allowed to

make the employer match as a Roth contribution. There's still a lot of uncertainty about that. How does that go through payroll systems? Because now you have to sort of impute income. So my understanding. And look, things change in this space, but my understanding is many employers have not yet adopted that. Right? So. 

And by the way, my understanding is they don't have to adopt it. So I think a lot of folks are going to wind up with the employer contribution still being a traditional, you know, so it's not included in taxable income when you get it, and then in retirement, it would be included when you take it out. But at least it's some employers, it's going to be possible to say, hey, employer, you know that employer contribution you give me every, every pay period? Make that a Roth instead of a traditional, it just means you're going to have more taxable income this year, and then it would be tax free growth and hopefully tax free treatment on the way out.

So, Sean, thank you for, like, I mean, that was such a clear, like, breakdown of kind of the differences

between traditional versus Roth iras versus 401 ks. But I think, and something that's, I think we've discussed a little bit in the past, too, of just kind of those misconceptions around these terms.


So you mentioned, like, the 403 B, the 457 the know, I've heard from people in the past, like, they hear this, oh, 401K, that means $401,000 that we're saving for retirement. But it's not that. Right.

It's just the IR's type term for your retirement accounts. There's not, there's subtle differences, but really, I mean, they're four hundred one k, the four hundred three b, the four hundred fifty seven, they're all doing kind of the same thing.

That's exactly right. In fact, those terms come from the Internal Revenue code. Right. So the 401K exists because Congress believe it was in 1978. But don't I have to double check that? In 1978, they enacted subsection 401K, allowing,they call them cash or deferred arrangements.

And, you know, back then it was sort of like a one off thing. It was designed for executives to defer highly

taxed income, and over time, it became sort of the top workplace retirement account. So it's. yeah, when you hear, okay, I have a 457 plan or a 403 B plan, that's just the internal revenue code. It has nothing to do with the amounts involved. It's just a code name, basically. And we won't go down this rabbit hole much further, listeners, I promise we could, because this is so much fun. But I want to add one thing.

The 401K really came about when this firm in Philadelphia in the late seventies, early eighties looked at it, knowing that it was really designed for executive comp. Cause at this time, everyone got a pension, or many people got a pension. And he looked at it and he thought, I think this could work for employees. And he just did it. There was nothing code that said he definitely could. He just thought, I think I can. And then they ruled that they could.And actually the deduction was much higher at that time.

So anyway, for those history buffs out there, the 401K was ultimately kind of an accidental retirement plan that's become the norm in the United States. 

So moving on a little bit, Sean, why is it that someone would choose to invest in some sort of IRA rather than a traditional tax shelter where the investor receives a tax deduction when they contribute? Well, I think you have to think about the different types of accounts out there, right? So there's just the default, which is a taxable

brokerage account, which offers no tax deduction on the way in and offers taxable growth every year.

Now that has to be paid out, growth, dividends, interest, that sort of thing. So, you know, that is not as efficient. And by the way, it's not as automatic, right? So with a 401K, say at work, you can take a, you know, you set it up through payroll withholding. It's very automatic.

Now when we think about workplace, say a 401K versus an IRA at home, many times folks favor the 401K, say at work, because of the so called matching contribution, right? The employer will give inside the account maybe $0.25 on the dollar, $0.50 on the dollar, 100 on the dollar. That would be a reason to favor contributing

to a 4401k instead of an IRA. But maybe you're beyond the employer match and then you have to look at, well, what are the investments available to me? Right?

So 401 ks vary in quality. And I think there's a long term trend that 401ks tend to be improving in terms of investment quality. So what I mean by that is the options available, the diversification available inside that four hundred one k, and the expenses associated with those investments. It still exists in the world today where some employers offer a plan where you look at the investment options and you say, well, either that's undiversified or you say, oh boy, that's a high investment expense.

When with an IRA, I pick the financial institution. The world is my oyster. Think about how many financial institutions are out there and think about how many of them offer very low cost investment options.

So some folks might say, you know what I'm going to do? I'm going to contribute to my 401k up to the extent of the match and that's it. The next dollars I take home, I'm going to put, say, my own Roth IRA at home because I'm not so fond of the investment choice inside this particular 401k. Now, there are other tax shelters available though, right? And oftentimes these take the form of a life insurance policy.

I myself am not too fond of those things, right?

So when we have a life insurance policy, sometimes we exploit, there's a code section that says that life insurance proceeds are generally tax free. So sometimes folks try to build up, it's either cash value or another valuable asset within the confines of a life insurance policy. To my mind, that introduces complexity, higher fees and counterparty risk to some degree in a way that I think solves for a problem that doesn't really exist.

I think today's investment environment is so favorable in terms of fees being relatively uncomplicated. The other thing too is when we invest in a life insurance policy, we forego a tax deduction. Yeah, it'll be tax free on the way out, but we don't get the upfront tax deduction today. So I tend not to like that. So, yes, there are different vehicles out there. I think for most Americans, focusing first on getting that employer match to the fullest extent possible is a great place to start.

And then we can think about, well, maybe it's a Roth IRA at home, maybe it's just keep deducting into a 401k. Maybe we have a great 401k. Those exist too. So maybe, you know, so there are different factors out there. Brian, I hope that answered your question. I'm happy to discuss it further.

Well, you answered the question and you did a good job kindly explaining that there are life insurance products with investment options in them. And you handled it in a way that is professional because there is a segment of society, a small sliver, where perhaps those products make some sense. But that segment is slim. And so it's our podcast that we can say this, and we don't say words like this very often.

When somebody tells you you can invest in your life insurance policy, think shit. Just total garbage. Crap riddled with fees. They're going to rip you off. Imagine a used car salesman with a gold chain trying to sell you a $4,000 car without an engine.

You see it all over social media. It's on TikTok. It's on Instagram. Beware. It is just think shit. When someone says, oh, you can invest in your life insurance policy just like Walt Disney.

Anyhow. Yeah, Brian, I think we have to step back and we have to say, there's an old saying that I think still is true. Invest through investments and insure through insurance. Right? So the idea is with some of these insurance products is, well, we're going to invest through them and exploit the tax rules that are very favorable towards insurance products. 

None of this is to say term life insurance is not a good thing. Now, look, if you're 70 years old and worth $5 million and spend $100,000 a year, you do not need term life insurance. Almost certainly. Right.

But yeah, if you're a working, you know, married couple, you're working. You got a three year old and a one year old at home, probably you need some term life insurance. We're not giving you specific advice in this podcast.

But term life insurance has no investment component. You just pay a premium every year and you get nothing from that unless you die, right? It's a bet you're hoping to lose. Where we're, what we're cautioning against for most applications is we're saying, well, there are these life insurance products that have the insurance component and an investment component.

My thesis is for 99% of the audience, probably more, that's solving for a problem that does not exist. And there are plenty of very good alternatives in the investment space, whether that's a 401K Roth IRa, just a simple taxable brokerage account that solve for that with lower fees and lower complexity. And that distinction is essential.

Like, I've had a term life insurance for years. It's affordable, it replaces an income stream if something happens, and it's not. I mean, 40, 50, $60 a month, maybe, for many policies where the benefit is seven digits or more. So I really appreciate you making that distinction.

So, Sean, you've kind of explained some of these differences between the 401 ks, the IRAs. And I know you've talked about some of the difference then with the Roth 401K versus the Roth IRA, but then we also have the spousal IRA. Right.

So can you tell us a little bit about what a spousal IRA is and how that might relate to these Roth 401 ks, these Roth IRAs, all of these other ones?

Yeah, Bruce, great question. So the spousal IRA is something that doesn't get enough appreciation and attention out in the personal finance space. So there are many folks where we have a married couple, and one of them does their work primarily in the home to foster other goals other than, you know, employment might be raising children, for example.

So you have sometimes referred to as a stay at home spouse. Right. And they're focused on things that are not w two employment or self employment. And so they don't show any taxable income, but they have a spouse that goes to a w two job or has self employment, has earned income.

And so the question becomes, well, wait a minute, there's two of them in retirement, but only one of them has access to retirement accounts. Well, not entirely true. They both, in that example, have access to an ira, whether it's a traditional Ira or a Roth Ira.

So let's say we had a married couple and they, you know, one of them makes $150,000 at a w two job and the other is a stay at home spouse. Well, they can both make contributions to an IRA or a Roth, traditional IRA. Roth IRa, whatever it might be, because the non working spouse can use the working spouse's earned income to facilitate a, what they call a spousal IRA contribution.

And this makes a lot of sense because at retirement, they're both going to be retired and they're

both going to need income and support. So why not have the non working spouse be able to make a maybe a tax deductible contribution to a traditional IRA or a Roth IRA contribution. So this is for those home retirement accounts.

Traditional IRa or Roth Ira, where it doesn't apply is our workplace retirement account. There's no such thing as a spousal 401K or spousal Roth 401K. So, you know, if one spouse has a work that's great, only they can contribute to it. Right.

Their spouse cannot contribute to it regardless of whether the spouse works or doesn't work. Works at another employer, doesn't work. Four hundred and one s and other workplace plans are just for the individual. And there's no spousal component there.

Should people contribute to their traditional retirement accounts or roth retirement accounts

or a mix of both? What should they be doing, from your opinion? So in my opinion, for most Americans, the traditional retirement account contributions still make a whole lot of sense.

And it goes back to what we talked about at the beginning of the podcast. The technical term is arbitrage. Right. When you deduct into your four hundred one k at work, say you get a tax benefit today at the highest marginal rate, right. If you're in the 22% bracket, 24% bracket, 32% bracket, 35%, whatever it is, that's the federal income tax benefit.

And then add the highest marginal state tax benefit if you're in a state with income tax. Right. But then when we retire, it turns out they tend to be lightly taxed because we go back up through the standard deduction 10% bracket, 12% bracket. So I think traditional makes a lot of sense for most Americans, and I certainly wouldn't

fear making traditional retirement account contributions. That said, I think for some in the audience, what's going to be true is why not deduct at work, so traditional four hundred one k at work and then do a Roth IRA at home.

And this has to do with the tax rules. Right. You can be an NFL quarterback and contribute to a traditional 401K or a Roth 401K. There's no income limits on the Roth 401K. But the thing is, if you put a dollar into the Roth 401K, that's a sacrifice tax deduction. The limit for 2023, if we're under age 50, is 20. I'm sorry. The limit for 2024 if we're under the age of 50 is $23,000.

So if I put 23,000 into my Roth four hundred one k at work, that's 23,000 of sacrificed tax deductions. Right. So that's a real trade off. But what about at home? Well, the income limits on deducting a traditional IRA contribution when we're covered by a workplace plan are very low.

So for a bunch of people in the audience at home, we're not going to be able to deduct a traditional IRA contribution, but we can still make a Roth IRA contribution.

So I sometimes refer to that as dynamic duo planning. We deduct fully at work into our 401K traditional, and then we do a Roth IRa at home. And what we're doing there is we're optimizing for known trade offs at home.

We don't have, in many cases, not all cases, but in many cases, we don't have the ability to deduct a traditional IRA contribution.

So we're not sacrificing a tax deduction by maxing out our Roth IRA at home, but at work, if we do a Roth 401K, we are sacrificing a tax deduction. So I think for many in the audience, this is just my opinion. Do your own research, your own thinking. I think the dynamic duo is deduct into the do a Roth IRa at home. 

Sean, if there was one simple explanation or lesson, something that our listeners can walk away with and remember and apply in their lives, what would that one thing be?

My takeaway from this conversation and just thinking about our saving for the future is let's get money into those retirement accounts, whether it's traditional or Roth. And let's not worry about what social media. And Brian, you made a great point. This is out there on TikTok, and I myself am not on TikTok, but there are these people saying, oh, my goodness, you got a government's gonna own 30 or 40% of it.

And I've done the numbers. I have a little blog,, comma. I have some posts where I've actually run through some hypothetical examples. And even for very affluent couples, it turns out they're relatively lightly taxed in retirement, even with very large traditional retirement accounts.

So I think you're only going to help your future self by building up these tax advantage retirement accounts, whether they be traditional or Roth. And I tend to think traditional tends to be the better solution for most in the audience, at least having more of your money in traditional than in Roth.

Now, for our listeners, we have only scratched the surface. If you listen to this episode and you realize that you

have a thirst to learn more, you need to learn more. I cannot say enough great things about Sean.

Sean, can you share with our listeners where they can follow you for the types of tips that you've given today?

Thanks so much. I really appreciate being here today and this conversation. You can follow me on my blog, fi It's the intersection of tax planning and financial independence. I'm on Xer, the artist formerly known as Twitter, on Sean Money and tax.

And then you can find me on YouTube. I generally do a weekly video every Saturday morning at Sean Mulaney videos. Thank you for your time today. It was an excellent conversation. Thank you, Sean. Thank you. Really appreciate it.


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