By Brandon Miller, CFP–
Merging Finances Is the Ultimate Relationship Commitment
Nothing says “I love you” and “I’m committed to you” like merging finances with your partner. Well, being whisked away to a surprise weekend somewhere tropical will also do it. But, we’re here to talk money. And for couples who are ready to take the next step in their relationship, it’s time to combine finances.
For many people, this union is scary territory, and they’ll put it off for as long as possible, or even forever. Combined finances feels so—gulp!—official and vulnerable. And, as we know in the gay community, we can put off merging finances even longer, especially since we tend to find love later in life.
Recently, I’ve been helping a dear friend navigate the best time to merge finances after dating someone for two years. Their incomes are different, and it creates their own unique dynamics to manage. But after two years, they’re ready to take the next step in deepening their relationship. Combining their finances is a tangible way to demonstrate that they’re in this life together, rather than living individually. The time for their conversation is now.
Plus, studies show that people in relationships who merge their finances are happier in the long run. Let’s explore some reasons why.
Owning Community Property Versus Separate Property
A good starting point is to understand the difference between community property and separate property.
Generally, community property is anything that you as a couple get together: a mortgage, a car, a pile of cash, etc. In California, if you’re married or have a registered domestic partnership, all property you acquire during that marriage is communal.
Meanwhile, separate property is typically anything you owned before your union. Also, anything you buy with money you had before the partnership is separate property, as are inheritances that go to one person. So, that 401(k) you had before you met your partner is technically yours rather than communal.
Some people stress over who owns what property once you combine finances. By knowing this distinction, you can better understand how your partnership affects the property you own. From there, you can have more informed discussions and decision about money.
Filing Taxes Jointly
Just because you are married doesn’t mean you qualify for a tax break—it’s not as straightforward as setting a wedding registry. Married-filing-jointly folks will often pay more in taxes than two single filers with the same income. Like the tax code itself, it’s complicated, and it’s best to do your research (and consult a Financial Planner or CPA) to see what works best for your situation.
But if one partner is a high earner and the other isn’t, joint filing can work to offset the high-earners income against the other. If your spouse makes $500,000 and you are a stay-at-home partner, you may be able to split the difference and pay less to the government as a result by each claiming $250,000 for income.
While no automatic benefit exists to married and filing together, it does for registered domestic partnerships! Remember, California is a community property state and domestic partners file together, but the IRS doesn’t recognize domestic partnerships in the same way. For federal tax returns you have to file separately as individuals.
Maximizing Retirement Accounts
Another benefit of combining finances may be the ability to help a partner better save for retirement. Let’s say that one partner has access to a Roth 401(k) through their employer but doesn’t have the cash flow to max that account out. If their partner has money available to add to that account, the contribution gives both people another way to save for the future. If you are married in a community property state, both partners win. Legally, it doesn’t matter if you or your partner puts money into the other’s retirement account when you merge finances in this way.
So, What Keeps Couples From Combining Finances?
Often, I find that it comes down to ego—the mindset of this is mine and this is yours. You may feel you protect yourself better by drawing a line in the sand with your finances. But are you doing that with the rest of the relationship? Do you put lines around any of the furniture your partner’s allowed to use or which food is theirs versus yours, or any other division? I hope not!
If you’re worried about what’s mine versus yours, remember: Anything you came into the relationship with is still yours as separate property. And if you get a good prenup (or postnup) in place, you can be protected should you ever separate.
Merging finances doesn’t have to happen all at once. Often, I advise my clients to start with a joint banking account that you both add money to for dual expenses. Over time, however, I find that more money gets put into the joint account and less money goes to their individual accounts. Eventually, they often end up closing those individual accounts altogether.
So, what’s the ultimate takeaway? Merging finances is about more than money. By choosing to combine your financial lives, you’re saying that you’re ready to deepen your commitment to your partner. You’re making each other a priority. And that is an act of true love.
Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Brio Financial Group is a registered investment adviser. SEC Registration does not constitute an endorsement of Brio by the SEC nor does it indicate that Brio has attained a particular level of skill or ability. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
Money Matters
Published on February 23, 2023
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