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A Primer: The ABCs of LGBT retirement

Financial considerations for same-sex couples planning for their retirement years.

We are updating this article in light of the recent Supreme Court decision on DOMA. Please check back soon for updated content.

Today, there’s a lot to be optimistic about if you are a member of the LGBT community. Same-sex marriage, for instance, is, or is about to be, legal in 10 states and the District of Columbia, and nine states have civil union or domestic partnership provisions for same-sex couples. The U.S. Supreme Court will be deciding on some potentially groundbreaking same-sex marriage cases this year.

Still, the LGBT community faces challenges, particularly when it comes to finances and saving for retirement. For instance, same-sex couples, even if legally married in their state, generally:

  • Must still file separate federal tax returns;
  • Are not eligible for Social Security spousal or survivor benefits;
  • Are subject to less favorable tax rules with respect to employer-provided health coverage; and
  • Are subject to less favorable federal gift and estate tax rules

Extra expenses for same-sex couples mean that they have a tougher time saving than opposite-sex couples. And, while retirement income rules and inheritance laws provide special protections for married couples, that is not always the case for LGBT adults.

Retirement Income
Social Security

Roughly half of Americans rely on Social Security for more than 50 percent of their retirement income, according to a 2012 AARP fact sheet. And, a married person can draw a higher benefit if his or her spouse has earned substantially more money during their working life. This is not the case for same-sex couples.

In addition, if one spouse in an opposite-sex union has not worked the requisite 10 years that Social Security generally requires to receive a benefit, they are generally able to draw a benefit based on their spouse’s eligibility. Not so for same-sex couples—an issue that particularly impacts same-sex spouses who may be stay-at-home parents or caregivers.

Since same-sex couples—married or unmarried—are generally not afforded survivor benefits for Social Security, they are charged with securing retirement income and survivor protection for their partners without the same level of Social Security protections.

In these cases, life insurance which provides a death benefit to the beneficiary of your choice, and income annuities, which provide a steady stream of income for life, can offer protection for families and spouses of same-sex couples.

Pension and 401(k) savings plans

A traditional tax-qualified pension plan offered by employers, called a defined benefit plan, has certain protections for opposite-sex married couples. One important provision is that the plan must provide a joint-survivor payout as the default option for plan participants. This means that unless it is waived, the pension will provide a benefit to a surviving spouse for as long as he or she lives.

Depending on the employer’s definition of marriage, same-sex couples may or may not be eligible for this payout option, even if they are married legally in their state. If they are eligible, it may not be the default option—something you wouldn’t want to find out after-the-fact. Check your plan for details.

If you have a defined contribution plan (e.g., a 401(k) plan), you can designate anyone as the beneficiary, subject to applicable requirements. However, many people may overlook or forget to update their beneficiaries. If you don’t elect a beneficiary, your account will be subject to inheritance laws that may not recognize a same-sex marriage or partnership. Make sure your beneficiary designations are up to date.

Have questions about your retirement income or life insurance needs? Speak with an Agent today.

This is document is intended to provide general information only. It may not be relied upon to avoid IRS or other tax penalties. How this information may apply to you depends upon your individual circumstances. You should consult with your own tax and legal advisers to determine how this general information may apply in your individual situation. New York Life and its employees cannot provide tax or legal advice.

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