Save (For) Yourself

Taxes

Before my family and I took off on a recent flight home, the flight attendant delivered the usual warning: An adult passenger should put on her own oxygen mask before assisting anybody else.

My daughter, seated next to me, knew it was the obvious thing to do. “It sounds harsh, but it’s right, Mom. Save yourself first. Then me, if I need help.” She knew I wasn’t much good to her or anybody else if I was unconscious.

The exchange got me thinking about another kind saving. Contributing to my own retirement in a tax-advantaged savings account is a lot like placing that oxygen mask on myself first—but it might not be obvious to many women like me. 

A new brief from the Center for Retirement Research at Boston College by Alicia Munnell, Wenliang Hou, and Geoffrey Sanzenbacher finds that in about half of two-earner couples, only one earner is covered by an employer retirement plan and that worker tends not to increase contributions to account for his or her spouse. The overall contribution rate for two-earner couples with a single saver was half of that for two-earner, two-saver couples. 

That sounds uncomfortably familiar. When I started writing for the Tax Policy Center five years ago, our family used most of my earnings to cover expenses, like the mortgage or groceries, or to build the kids’ savings accounts. My husband, meanwhile, did the retirement saving by shifting some of his income to his employer-based 401(k). 

But Munnell, Hou, and Sanzenbacher demonstrate how that choice ultimately puts me at greater risk of failing to maintain my standard of living in retirement than a single woman. They conclude that two-earner married couples could benefit from more financial education and broader access to workplace retirement plans.

Other data show that women are more likely than men to participate in workplace retirement plans, but men generally contribute more. It is harder to find data about self-employed women.  

However, I can attest to the need to better educate women about the tax advantages of maximizing saving for retirement. Four years ago I conducted an informal, unscientific poll among my female friends, asking whether tax incentives drove them to save for retirement. Half said they never thought about the tax benefits of retirement saving. A few didn’t think they earned enough to bother opening a tax-advantaged retirement plan. I didn’t think I did either.

But then a TPC colleague told me about the individual 401(k), sometimes called a solo 401(k) or a uni-k. The qualified retirement plan is designed specifically for small business owners with no full-time employees other than themselves and their spouse. 

As an independent consultant, I can contribute both as an employer and as my own employee. Contribution limits are exceedingly generous—up to $56,000 annually—and can be made either pre-tax or in the Roth version, where contributions are made with after-tax income but withdrawals are tax-free. I use the traditional option so my contributions are deducted from our household’s taxable income, reducing our current income tax bill. I won’t pay income taxes on those contributed earnings until I make withdrawals from the account upon my retirement.

So, I opened an account, and have been contributing to it in the four years since. But I have to admit:  I have felt kind of funny about my contributions. Am I—a married, secondary earner with a spouse already contributing to his employer’s 401(k)—the kind of person the solo 401(k) is designed to help? Or is this just another tax shelter that tends to benefit those who don’t need it

Sitting on that airplane, I explained how a solo 401(k) works and asked my daughter what she thought. (My teenager seems to have an extremely acute sense of fairness.) “Can other business owners still use the plan, even if you are,” she wanted to know.

Yes: According to a 2017 survey of 1,960 small business owners, about two-thirds have some kind of retirement savings plan. Of those, 43 percent have a self-employed 401(k). The rest have other tax-advantaged plans like SIMPLEs or SEP IRAs, or save in another way. (Of the one-third who don’t have a retirement savings plan, 37 percent report that they don’t earn the necessary profit to do it.)

My daughter furrowed her brow, and asked, “Then what’s the problem?”

Maybe the problem with the individual 401(k) is two-fold. I can’t find any data to show that solo 401(k) account holders are disproportionately super wealthy, but generally, people at the top of the income distribution are more likely to have retirement accounts and to contribute more to them. 

That could lead to the first problem: Inefficiency. Suppose a high-income spouse maxes out his employer-sponsored 401(k) contributions but the family wants to put away more in a tax-advantaged account. If the other spouse is self-employed, they could simply move money that would have gone to a taxable savings account to the second spouse’s uni-k. The family’s total savings did not change, but Treasury potentially loses a lot more revenue than it might have.

The second problem could be underutilization, as The Wall Street Journal has noted. Individual 401(k)s have been around since 2001, but many financial services firms waited years before they started offering the plans. And many eligible business owners still don’t know the option is available. Maybe that’s one reason why the federal tax expenditures for self-employed retirement plans are small relative to other federal tax expenditures for retirement saving. Estimates range between $69.5 billion and $113.2 billion for fiscal years 2019 through 2022.

A couple weeks ago I asked several self-employed, married women who had consulting jobs whether they knew what an individual 401(k) was. Of eight, five did not—but were very interested in learning more about them.

There could be a lot of married women out there earning money to support their families—independent contractors like realtors, child care providers, tutors, IT specialists, or Lyft drivers—who don’t yet know how easy it is to open and contribute to an individual 401(k) so they can support themselves in retirement, too. 

Women—no matter our marital status—need to save for ourselves first. We won’t be much good to our future selves if we don’t at least try.

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.

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