The loss of a spouse brings great hardship. Financial burdens can make it even harder. Higher taxes can hit the surviving partner. This is often called the "survivor's penalty." It affects many, especially older women. In 2021, the Centers for Disease Control and Prevention provided data that women tend to live longer than men. It showed that male life expectancy at birth was 73.5 years. For females, it was 79.3 years. This data highlights the issue for women. There is a silver lining, though. Experts suggest there are ways to lessen these financial issues. Married couples can use these strategies to their advantage.
Understanding the Survivor's Penalty
The survivor's penalty emerges primarily from the shift in tax filing status following a spouse's death. Initially, widows or widowers may file jointly in the year their spouse dies if they do not remarry within that year. Subsequently, the survivor must file as single, which could result in higher marginal tax rates due to more minor standard deductions and narrower tax brackets. For example, in 2023, the average deduction for married couples is $27,700, whereas single filers are limited to a $13,850 deduction.
This tax increase can be a significant financial shock, exacerbated when individual tax provisions introduced by former President Donald Trump's legislation sunset. Current tax brackets are lower through 2025, making future higher rates a concern for those inheriting their deceased spouse's individual retirement accounts (IRAs).
Strategic Tax Planning Steps
Certified Financial Planner (CFP) Edward Jastrem of Heritage Financial Services in Westwood, Massachusetts, points out the necessity of proactive planning. He suggests that one effective strategy involves partial Roth IRA conversions. This entails transitioning parts of pretax or non-deductible IRA funds to a Roth IRA, which then grows tax-free. Performing these conversions judiciously over several years could minimize the taxes due upon conversion, providing a more favorable long-term tax rate.
George Gagliardi of Coromandel Wealth Management in Lexington, Massachusetts, echoes this sentiment. He highlights the importance of strategic conversions, noting the potential for significant tax savings when executed over time.
Investment and Estate Planning Considerations
Beyond IRA strategies, attention to account ownership and beneficiaries becomes critical. Assets inherited by a surviving spouse often receive a "step-up in basis," adjusting the asset's original cost to its value at the deceased's time of death, thus potentially reducing capital gains taxes on future sales. Jastrem emphasizes knowing which assets are highly appreciated to take full advantage of this step-up and avoid unnecessary tax liabilities.
Moreover, considering non-spouse beneficiaries for IRAs might benefit couples expecting sufficient savings and income to sustain the surviving partner. While this approach necessitates awareness of inheritance rules, particularly the changes introduced by the Secure Act of 2019, which shortened the timeline for non-spouse beneficiaries to withdraw from inherited IRAs, it can significantly decrease the tax burden on IRA distributions.
Preparing for the Future Together
The overall advice from financial experts underscores a theme of preparedness and foresightedness. Surviving spouses, particularly older women, face an arduous journey navigating post-loss life. The financial strategies discussed deliberate Roth conversions to informed beneficiary designations- offer a roadmap to mitigate the so-called survivor's penalty.
The Secure Act of 2019 critically altered the landscape for inherited IRAs, abolishing the possibility for certain heirs to "stretch" IRA withdrawals across their lifetimes. With a shortened withdrawal timeframe, strategic planning becomes even more essential for those looking to ease future tax burdens.
As the tax landscape evolves, married couples must remain vigilant and proactive in their financial planning efforts, particularly those with significant age gaps. The looming prospect of higher taxes post-loss can be daunting, but with adequate preparation and strategic action, surviving spouses can navigate these challenges more seamlessly. The need for such planning speaks to a broader issue within our financial system-a system that, in moments of loss, complicates grief with financial anxiety. Through careful, strategic planning, couples can confront this system, ensuring that they do so with economic security and peace of mind when they face the inevitable.
