Life is precarious. And life is precious.
For years we’ve heard people say, “Here today, gone tomorrow.” No matter what our age, it’s one of those flip phrases that are bandied about without thinking of the implications. But recently, it has taken on new relevance.
The pandemic has rudely reminded us of its implications. It is creating unexpected widows and widowers as seniors lose their partners with none of the traditional health warnings.
The gift of preparedness
As a couple, one of the greatest gifts you can give one another is the gift of preparedness. The role of careful retirement planning is to make those later years as stress-free as possible. It is about making the most of the resources that have been accumulated over time. And most retirement advice is geared towards married couples.
But one of you will live a few – or many – years without the other. That’s where estate planning comes in. And estate planning is much more than just having wills and other instruments in place. It’s also about how those accumulated resources will support the surviving spouse for as long as needed.
Do an online search for ‘investment strategies,’ ‘tax minimization’ or ‘portfolio risk management’ – just for starters – and you’ll be overwhelmed by all the helpful suggestions. But, trying to sort the advice out without the help of a professional can be precarious because so many factors are at play all at one time: inflation, market volatility and tax code changes, among others.
Yet, curiously, one area that receives very little attention is that of a surviving spouse’s inherited IRA.
That’s surprising. The IRA is one of the most common assets a couple will have in their portfolio. About $25 trillion is held in retirement assets in the U.S., so inheriting a deceased spouse’s IRA touches almost everyone.
Mishandling a spousal IRA can do significant damage to the survivor’s finances.
Special benefits for sole spousal beneficiaries
Widows who are the sole beneficiary of their husband’s IRAs enjoy special tax treatment if they are set up correctly. As the widow, you would have options of how to receive the IRA, including:
- establishing an ‘inherited IRA’,
- doing a spousal rollover, or
- doing nothing
Would you know the difference between those options and the benefits of each?
As you research, the details may seem like a foreign language – and overwhelming – but not if they’re explained clearly and methodically.
Exceptional pitfalls for widows
Widows also face traps and hurdles that can wipe out significant portions of their inheritances.
While the first year of widowhood might be the hardest emotionally, the second year is when the IRS’s regulations have the most significant financial impact.
When you married, as newlyweds, you were penalized when you first filed ‘married jointly.’ You paid more income tax together than two single individuals would with the same total income. It was called the “Marriage Penalty.”
As a widow, for the year of your spouse’s death, the IRS allows you to file as ‘married filing jointly.’ But in the second year, the “Widow’s Penalty” kicks in. You will lose the higher standard deduction of being part of a couple, so your taxable income may be higher than before. You will also be taxed at the rates on the tax tables for singles, where next-tax-bracket thresholds occur at much lower dollar values.
Other obligations have lower thresholds, too, and may raise your tax burden:
- The “Social Security Tax Torpedo” can throw you into higher percentages of your Social Security income being taxable.
- The surtax on net investment income is triggered on lower levels of Modified Adjusted Gross Income when you’re single.
- IRMAA (Medicare’s Income-Related Monthly Adjustment Amount) may apply to your monthly Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage) premiums where it didn’t when you were in a couple because the singles thresholds are lower.
The number of tax disadvantages – and advantages – of widowhood may appear overwhelming but, again, not if described in everyday language and with ample examples.
Timing is everything
Widowhood is a time for grieving. For honoring. For getting your feet back on the ground.
It’s no time to worry about missing critical deadlines or making financial mistakes that can derail your post-widowhood plan. The scary part is that many decisions cannot be reversed.
Before now, no one had addressed a widow’s finances understandably and completely.
However, as Ed Slott, CPA – the nation’s leading expert on IRAs – says:
“Finally – tax planning help for widows! This book is about what you can do after you lose your spouse, when you need the right advice the first time.”
The book he is referencing is my “Inheriting Your Spouse’s IRA (The Widows Guide to Keeping More of Her Assets).”
You and your spouse can use the planning guide to be sure your retirement and estate plans are rock-solid for whichever spouse becomes the survivor. Or you can use it as the survivor who is navigating the whole IRA and RMD universe.
In either case, this guide includes the new tax rules and limitations brought about by the recent SECURE Act.
The important thing is that you use it to your greatest benefit.