September 2, 2025 • 17 mins
When one spouse passes away, the survivor often faces what is known as the “widow’s tax.” It is not an official IRS tax, but the impact of moving from married to single tax brackets. A couple earning $120,000 in the 12 percent bracket can see the surviving spouse pushed into the 24 percent bracket with the same income. This tax bracket compression happens at the most vulnerable time.
Watch as James outlines three strategies that help protect a surviving spouse from this financial burden. Strategic Roth conversions can reduce future tax exposure by shifting assets from pre-tax to Roth while in lower brackets. Maximizing Social Security benefits creates a stronger income floor through survivorship benefits. Understanding and applying the IRS life expectancy tables for Required Minimum Distributions ensures more efficient withdrawals.
These approaches require careful timing and planning, but they can ease the long-term financial impact on a surviving spouse. Proactive strategies today can secure greater financial stability for tomorrow.
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Episode Transcript
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Speaker 0 (00:00):
Most couples plan their finances together, but
very few plan for what happenswhen one spouse passes away and
the result?
Well, it's a surprise tax billthat can crush the surviving
spouse if you don't take stepsto proactively alleviate this on
the front end.
So today I'm going to show youthree things you can do right
now to take steps to protectyour loved one long after you
have passed.
(00:20):
Practically speaking, whatwe're talking about today is the
widow's tax.
Have passed.
Practically speaking, whatwe're talking about today is the
widow's tax.
Instead of telling you what thewidow's tax is, let me show you
a quick example to show you howdevastating it can potentially
be to a surviving spouse.
Here you can see on my screenis tax brackets for the 2025 tax
year.
But before we dive into these,let's assume that you're married
and let's assume that you andyour spouse have $10,000 per
month of income, so $120,000 peryear If you're under 65,
(00:44):
meaning if you don't have anincreased standard deduction,
your standard deduction formarried filing jointly is
$30,000 per year and for singleis $15,000 per year.
So let's see how things wouldchange if one of you were to
unexpectedly pass away.
So let's start with $120,000.
If you have $120,000 of income,you can take a $30,000 standard
deduction if both of you arestill living.
(01:05):
So of that $120,000, yourtaxable income is now down to
$90,000.
If we compare that to these taxbrackets here, you see that the
first $23,850 of that $90,000of taxable income is subject to
a 10% tax rate and the remainderis subject to a 12% federal
income tax bracket.
So you're in the 12% marginaltax bracket.
(01:26):
So keep that in mind.
Now let's look at what wouldhappen if one of you were to
pass away and if you were tomaintain that same level of
income.
So $10,000 per month, $120,000per year.
If you're single, you don't getto deduct $30,000 any longer.
You can only deduct $15,000 asyour standard deduction.
So now your taxable income is$105,000.
(01:46):
So not just is your taxableincome higher, but the tax
brackets that you're comparingthat to, or that you're filling
up, have lower thresholds.
Before you jump into higherbrackets, let's take a look at
that here.
You can see that the first11,925 is subject to 10%.
So you blow right through that.
Then the next amounts up to48,475, right, 12%.
(02:06):
You've blown through thatbecause, keep in mind, we need
to get to a full 105,000.
Here you go all the way throughthe 22% tax bracket and you're
into the 24% marginal taxbracket with the same exact
income that you previously hadwhen you were married.
Now the reality is typically,when one spouse passes away,
you're not spending the exactsame amount, but I wanted to
(02:28):
illustrate this to you so youcan see what the challenge is is
the marginal tax bracket inthis example jumps from 12% to
24% for the surviving spouse.
So what are some things thatyou can do today to protect your
spouse against when this isgoing to happen, because chances
are very good you're not bothgoing to pass away at the same
(02:49):
time.
So let's jump right into this,and as we do this, we're going
to take a look at sample clients.
Luke and Mary Information inhere just to illustrate what
we're going to be talking about.
They have about $2.7 million ininvestments today.
You can see how that's brokendown, and what I'm going to
illustrate here for you is themost important thing, or one of
the most effective things youcan do if you're retired is
going to be a Roth conversionstrategy, but not in the typical
way you might think.
(03:09):
So, generally speaking, whenwe're considering a Roth
conversion strategy, what we'relooking at is at a high level.
What do we expect your taxableincome to be?
Your taxable income today,based upon income sources you
have today, your taxable incomea few years from today and, most
importantly, your taxableincome beyond required minimum
distribution ages, in otherwords, the age at which you're
(03:29):
going to be required to starttaking distributions from your
IRA.
What are you expected to be interms of a tax bracket at that
point?
So that's what you can seeright here is when we take your
taxable income and then overlaywhat tax brackets are, we get a
general sense of in what yearswhat tax brackets you might be
in.
So this purple bar, what youcan see I'll zoom in here this
purple bar is showing what yourtaxable income, or what the
(03:52):
sample client's taxable incomeis going to be.
And then we're overlayingvarious tax brackets on top of
that and what you can see isthis blue bar.
Here that's a 10% tax bracket,here's a 12% tax bracket, 22%,
24%, 32% and what we want to dois find those years where you're
expected or where they'reexpected to be in lower income
tax brackets, and what we'recomparing that to is where they
(04:15):
expected to be in the future,and what we can see is they're
expected to be in the 22%bracket once required
distributions kick in, and thenthe very, very end of their
lifetime maybe just barelydipping their toes into the 24%
tax bracket.
So that's as things stand today.
But what I mentioned is that'sonly part of the equation.
The other thing we want to dois understand how does this
(04:36):
change, not if, but when onespouse predeceases the other.
So if I go back to this, Istarted with life expectancies
of 95 for Luke and 92 for Mary,just as a starting point.
Obviously, that's nothing thatcan be guaranteed, but something
that we want to at least use asa starting point.
But what happens if Luke passesaway one year after retirement?
(04:56):
Now, nobody believes this isgoing to happen to them, but it
does happen, and so how do wemake sure that we're prepared to
understand?
What would the consequences ofthat be in this case?
So let's change Luke's lifeexpectancy here to 68.
Well, if we go back to the taxtab, let's take a look at this.
This is just a projection ofwhat tax bracket would Luke and
Miriam be in today.
So, assuming they're bothliving, here's the marginal tax
(05:19):
bracket that we would expectthem to be in.
You can see, maybe it ends upsomewhere in the 24% bracket.
But if we switched over thiscold proposed plan obviously
we're not proposing that Lukepasses but in that new
comparison plan, what would thetax rate be for Mary in this
case?
Well, what we can see ispreviously, when they're in the
22 to 24% tax bracket.
Now Mary is in a 32% taxbracket, up into the 35% tax
(05:43):
bracket in many years.
So the reason for this isexactly what I showed at the
beginning of the survivor's tax,the widow's tax, even for the
same levels of income.
And, by the way, as part ofthis analysis, I'm factoring in
a 15% reduction in overallexpenses for Mary upon Luke's
passing.
And even with that, she'sprojected to be in much higher
tax brackets.
And it's not because of herspending, it's because of
(06:05):
projected required distributionsthat she's going to have to
take, regardless of how much sheactually wants to spend.
So what can they do toalleviate this?
Let's go back to the taxstrategies.
Here again is where we left offlast time, showing the taxable
income and what tax brackets dothey fill up.
But how does this change ifLuke passes away?
Well, under that plan or thatscenario, what you can see here
(06:28):
is what we just looked at Mary'sprojected to be in a far higher
tax bracket, not because of anyextra income she's taken in,
but because of compressed taxbrackets.
So when you can start toillustrate this, when you can
start to see this, that's wherewe can start to understand how
might various conversionstrategies what if you fill up
the 12% tax bracket?
Filling up essentially meaningconverting.
(06:50):
How do you convert assets fromLuke and Mary's traditional IRAs
into Roth IRAs in a year inwhich they're under the 12%
marginal tax bracket?
Well, you can see that doingthis is going to be beneficial
to the tax adjusted endingwealth that they might have, but
it's not making that big of adifference.
Mary is still, even in thisscenario where they're doing the
conversion up to the 12% taxbracket.
(07:11):
She's still expected to be in avery, very high tax bracket in
the future.
There's not been enough of amovement to get pre-tax assets
into Roth assets for that tomake too dramatic of an impact.
So you can start modeling out.
How would this change?
What happens if you do the 22%bracket?
Convert all assets from IRAs toRoth IRAs only to the extent
(07:31):
that you're filling up the 22%tax bracket.
And once you start to do that,not only is Mary in this
instance saving a lot more money, so a lot more protection for
Mary, but what you can see is,if this was the projection, this
was her taxable income prior toconversions.
If I get rid of this and nowjust show, here's her adjusted
taxable income with theconversions, the impact that
(07:52):
that had is she's no longerexpected to cross into that much
higher tax bracket.
So the specific numbers for you, of course, will be much
different.
And, by the way, if you want tobe able to model out your
scenario with this tool, you canget access to this in the
Retirement Planning Academy.
Link is in the show notes below.
But the point that I want to getacross is, if all you're doing
is modeling out Roth conversionstrategies if you're married
(08:15):
while the both of you are living, that's a great place to start.
That's where you should start.
That's base case.
But as time passes and as youtry to see, how do we not just
optimize our tax strategy butalso implement a tax strategy to
protect a surviving spouse?
You must also be taking intoaccount how would this change if
one spouse were to pre-deceasethe other?
Those are the two ways that youshould be looking at this.
(08:37):
So that's number one.
First way that you can help toprotect your surviving spouse
against the widow's tax is toimplement the right kind of Roth
conversion strategy, not justlooking at what do you do when
the two of you are living, buthow would that change if one of
you were to pre-decease theother, especially if that were
to happen early in yourretirement?
The second thing that you cando to protect against the
(08:59):
widow's tax is to maximize yoursocial security benefit.
Now, the way social securityworks is if one spouse
pre-deceases the other, thesurviving spouse has the option
of either collecting their ownSocial Security benefit or they
can collect the full amount ofwhat the deceased spouse was
collecting or would have beencollecting, depending on the
timing of when this happens.
Now, this doesn't actuallyminimize the tax hit of required
(09:21):
minimum distributions, like theRoth conversion strategy would,
but what it's doing is it'smaximizing the income.
So if a much bigger chunk ofincome is now being paid in
taxes when one spouse issurviving and the other is
deceased, well then at leasthaving a higher social security
benefit is going to provide astronger floor, a stronger base,
more income for that survivingspouse.
What you want to avoid is aninstance where all of your
(09:44):
income a big chunk of it is nowbeing paid in extra taxes due to
the widow tax and, by the way,the widow tax isn't an IRS name
of a tax, it's just what it'scalled.
When you say the compressed taxbrackets for the surviving
spouse in many cases are goingto be a lot more challenging to
deal with than they were whenyou're married jointly.
So how do you deal with that?
Well, you increase income inother places In retirement
(10:32):
no-transcript.
That's going to help protectthe surviving spouse because
it's a stronger, tax efficientincome floor that could
potentially offset some of theadditional taxes owed on other
assets.
So that's the second thing thatyou can do.
And then the third thing youcan do is understand how
different RMD tables come intoplay and how you can use them to
(10:55):
your benefit.
When we hear RMD requiredminimum distribution, we
typically think one simpleformula, or at least one formula
.
Maybe it's not simple.
That's not the case, though.
There are different lifeexpectancy tables that the IRS
allows you to use, dependingupon the situation.
You have the uniform lifetimetable, you have the single life
table and you have the joint andlast, survivor table.
(11:17):
So what's the difference andwhen should you use each?
Well, the uniform lifetimetable is going to be the one
that's most common.
That's the table where, if yousay, here's my IRA balance and
I'm at required minimumdistribution age, how much do I
need to start taking?
This is the table that the IRSsays if you're this age, here's
what we expect your lifeexpectancy to be and that's the
number you use to compare yourIRA balance and determine, or to
(11:39):
calculate, how much do you owein a required minimum
distribution for that year.
So that's the most common one,but there's two others.
The second is the single lifetable.
Now, typically, the single lifetable is being used if you
inherit an IRA from someonethat's a non-spouse.
So you had an uncle that passedaway, you had a parent that
passed away, they left you theirIRA.
The single life table is takinginto account both their date of
(12:00):
birth, their date of death,your date of birth to determine
the life expectancy or todetermine the required
distribution that you must takefrom that inherited IRA.
In many cases, a survivingspouse isn't going to use that
table A surviving spouse.
So, for example, if I were topass away, my wife would take my
IRA balance and it would justbecome hers.
It would roll over into herexisting IRA and when she turned
(12:23):
the age at which she had tostart taking required
distributions, all of it wouldbe in one account, meaning all
of the balance of her IRA andwhat my IRA used to be while I
was still living.
That's the first one, theuniform table but in this case,
what we're talking about istypically it's used if you're
inheriting an IRA from anon-spouse, but there are some
(12:43):
instances where my spouse mightelect that, even if I were to
pass away.
The first is if she's under 59and a half and she needs access
to the funds, so I pass away.
Today, my wife inherits my IRA.
If she were to roll that intoher IRA she can't touch it she
could, but she's going to pay apenalty on that, a 10% early
(13:03):
distribution penalty, becauseshe's not yet 59 and a half.
However, if she were to inheritmy IRA and she said you know
what?
James didn't leave me lifeinsurance, he didn't plan for
this, we don't have any money.
I need to tap into his IRAbalance what she would do is
actually keep the IRA separateand use this single life
expectancy table.
It would become an inheritedIRA with her as the beneficiary,
(13:24):
and the reason for that is shewould now be subject to required
minimum distributions, but shewould not be subject to the 10%
early distribution penalty.
So that's where some strategicplanning comes into play of
ideally she wouldn't need toaccess this, but if she did,
this is one strategy that allowsher to access those funds
penalty free.
She still pays taxes, but noadditional 10% penalty, and she
(13:47):
can then access those funds withno penalty and use them for her
living expenses.
So that's one instance in whicha spouse might elect the single
life table as opposed to theuniform lifetime table.
The other is if the spouse whopasses away is significantly
younger.
So let's say I'm 75 and myspouse is 63 years old, she
passes away and she has an IRA.
(14:08):
I could take her IRA and rollit over into mine, but I would
immediately have to begin takingrequired distributions from
that because that's now my IRA.
I'm 75.
I have to start takingdistributions from the entire
IRA balance because of my age.
However, if I elect the singlelife table and choose to elect
as a beneficiary IRA as opposedto move that into my IRA, I
(14:31):
don't have to begin takingdistributions until she would
have reached her requiredminimum distribution age.
So some strategy there aroundthis of depending on the age,
depending on the age gap, youmay want to potentially elect
that option.
And this just goes back to howdo you avoid that widow's tax,
how do you avoid getting crushedin retirement if you don't plan
(14:51):
correctly while you understandwhat options are available to
you to potentially minimize someof this tax impact?
And then a third part ofunderstanding these lifetime
tables is the joint and lastsurvivor table.
Where this comes into play isalso if I'm significantly older
than my spouse.
So let's go back to thatprevious example I'm 75, my
spouse is 63.
This is what we're both living.
This has nothing to do with oneof us passing, but when I
(15:13):
turned 75, I have to starttaking my required distributions
.
Now, if I was already 75, theywould have started at 73.
But just to use an example, ifI'm 75 and I'm taking my
required distributions, if I amtaking them based upon the
uniform life table, that's thestandard, that's what most
people are doing.
But what the IRS tells me is,if I'm more than 10 years older
(15:33):
than my spouse, I can begintaking required distributions
based on this joint lifeexpectancy table and because
she's so much younger, they givedifferent numbers they have to
take and actually minimizes therequired distribution that I now
have to take from my IRA, evenif we're both living.
The intention behind this issaying my IRA isn't just for me,
(15:54):
it's really for both of us, sothere's some leeway.
It's a lower required amount,which allows the IRA to be
preserved a bit more, becausethe IRS here is kind of
acknowledging the fact that it'snot just designed to support my
lifetime but also my spouse's,who's more than 10 years younger
than me.
So as you start to understandthese things, this is going to
help you when determining what'sthe best strategy to maximize
(16:16):
what your portfolio can do foryou while you're both living.
But also, how do you start toput a strategy in place to
protect a surviving spouse?
So, with all these strategieswhether it's Roth conversions,
whether it's your socialsecurity strategy, whether it's
understanding what lifeexpectancy tables to use when it
comes to required distributionsthere are pros and cons to each
of them.
None of these is universal inits application.
(16:37):
None of these is all good orall bad.
There is so much nuance andpros and cons that make sure
you're working with yourfinancial advisor to work
through some of these things.
Get the Retirement PlanningAcademy Again link is in the
show notes below if you want tomodel some of this out for
yourself.
But make sure you understandthese things so that you don't
go into retirement thinkingyou've got a great plan for you
and your spouse, only to haveone of you pass away prematurely
(16:59):
and have the surviving spouseaccept a much less ideal
retirement than they otherwisewould have had they planned for
this ahead of time.
But what?
These three things?
These are three things you canstart to implement into your
plan today to protect yourspouse for whatever happens
tomorrow.
Most couples plan their finances together, but
very few plan for what happenswhen one spouse passes away and
the result?
Well, it's a surprise tax billthat can crush the surviving
spouse if you don't take stepsto proactively alleviate this on
the front end.
So today I'm going to show youthree things you can do right
now to take steps to protectyour loved one long after you
have passed.
(00:20):
Practically speaking, whatwe're talking about today is the
widow's tax.
Have passed.
Practically speaking, whatwe're talking about today is the
widow's tax.
Instead of telling you what thewidow's tax is, let me show you
a quick example to show you howdevastating it can potentially
be to a surviving spouse.
Here you can see on my screenis tax brackets for the 2025 tax
year.
But before we dive into these,let's assume that you're married
and let's assume that you andyour spouse have $10,000 per
month of income, so $120,000 peryear If you're under 65,
(00:44):
meaning if you don't have anincreased standard deduction,
your standard deduction formarried filing jointly is
$30,000 per year and for singleis $15,000 per year.
So let's see how things wouldchange if one of you were to
unexpectedly pass away.
So let's start with $120,000.
If you have $120,000 of income,you can take a $30,000 standard
deduction if both of you arestill living.
(01:05):
So of that $120,000, yourtaxable income is now down to
$90,000.
If we compare that to these taxbrackets here, you see that the
first $23,850 of that $90,000of taxable income is subject to
a 10% tax rate and the remainderis subject to a 12% federal
income tax bracket.
So you're in the 12% marginaltax bracket.
(01:26):
So keep that in mind.
Now let's look at what wouldhappen if one of you were to
pass away and if you were tomaintain that same level of
income.
So $10,000 per month, $120,000per year.
If you're single, you don't getto deduct $30,000 any longer.
You can only deduct $15,000 asyour standard deduction.
So now your taxable income is$105,000.
(01:46):
So not just is your taxableincome higher, but the tax
brackets that you're comparingthat to, or that you're filling
up, have lower thresholds.
Before you jump into higherbrackets, let's take a look at
that here.
You can see that the first11,925 is subject to 10%.
So you blow right through that.
Then the next amounts up to48,475, right, 12%.
(02:06):
You've blown through thatbecause, keep in mind, we need
to get to a full 105,000.
Here you go all the way throughthe 22% tax bracket and you're
into the 24% marginal taxbracket with the same exact
income that you previously hadwhen you were married.
Now the reality is typically,when one spouse passes away,
you're not spending the exactsame amount, but I wanted to
(02:28):
illustrate this to you so youcan see what the challenge is is
the marginal tax bracket inthis example jumps from 12% to
24% for the surviving spouse.
So what are some things thatyou can do today to protect your
spouse against when this isgoing to happen, because chances
are very good you're not bothgoing to pass away at the same
(02:49):
time.
So let's jump right into this,and as we do this, we're going
to take a look at sample clients.
Luke and Mary Information inhere just to illustrate what
we're going to be talking about.
They have about $2.7 million ininvestments today.
You can see how that's brokendown, and what I'm going to
illustrate here for you is themost important thing, or one of
the most effective things youcan do if you're retired is
going to be a Roth conversionstrategy, but not in the typical
way you might think.
(03:09):
So, generally speaking, whenwe're considering a Roth
conversion strategy, what we'relooking at is at a high level.
What do we expect your taxableincome to be?
Your taxable income today,based upon income sources you
have today, your taxable incomea few years from today and, most
importantly, your taxableincome beyond required minimum
distribution ages, in otherwords, the age at which you're
(03:29):
going to be required to starttaking distributions from your
IRA.
What are you expected to be interms of a tax bracket at that
point?
So that's what you can seeright here is when we take your
taxable income and then overlaywhat tax brackets are, we get a
general sense of in what yearswhat tax brackets you might be
in.
So this purple bar, what youcan see I'll zoom in here this
purple bar is showing what yourtaxable income, or what the
(03:52):
sample client's taxable incomeis going to be.
And then we're overlayingvarious tax brackets on top of
that and what you can see isthis blue bar.
Here that's a 10% tax bracket,here's a 12% tax bracket, 22%,
24%, 32% and what we want to dois find those years where you're
expected or where they'reexpected to be in lower income
tax brackets, and what we'recomparing that to is where they
(04:15):
expected to be in the future,and what we can see is they're
expected to be in the 22%bracket once required
distributions kick in, and thenthe very, very end of their
lifetime maybe just barelydipping their toes into the 24%
tax bracket.
So that's as things stand today.
But what I mentioned is that'sonly part of the equation.
The other thing we want to dois understand how does this
(04:36):
change, not if, but when onespouse predeceases the other.
So if I go back to this, Istarted with life expectancies
of 95 for Luke and 92 for Mary,just as a starting point.
Obviously, that's nothing thatcan be guaranteed, but something
that we want to at least use asa starting point.
But what happens if Luke passesaway one year after retirement?
(04:56):
Now, nobody believes this isgoing to happen to them, but it
does happen, and so how do wemake sure that we're prepared to
understand?
What would the consequences ofthat be in this case?
So let's change Luke's lifeexpectancy here to 68.
Well, if we go back to the taxtab, let's take a look at this.
This is just a projection ofwhat tax bracket would Luke and
Miriam be in today.
So, assuming they're bothliving, here's the marginal tax
(05:19):
bracket that we would expectthem to be in.
You can see, maybe it ends upsomewhere in the 24% bracket.
But if we switched over thiscold proposed plan obviously
we're not proposing that Lukepasses but in that new
comparison plan, what would thetax rate be for Mary in this
case?
Well, what we can see ispreviously, when they're in the
22 to 24% tax bracket.
Now Mary is in a 32% taxbracket, up into the 35% tax
(05:43):
bracket in many years.
So the reason for this isexactly what I showed at the
beginning of the survivor's tax,the widow's tax, even for the
same levels of income.
And, by the way, as part ofthis analysis, I'm factoring in
a 15% reduction in overallexpenses for Mary upon Luke's
passing.
And even with that, she'sprojected to be in much higher
tax brackets.
And it's not because of herspending, it's because of
(06:05):
projected required distributionsthat she's going to have to
take, regardless of how much sheactually wants to spend.
So what can they do toalleviate this?
Let's go back to the taxstrategies.
Here again is where we left offlast time, showing the taxable
income and what tax brackets dothey fill up.
But how does this change ifLuke passes away?
Well, under that plan or thatscenario, what you can see here
(06:28):
is what we just looked at Mary'sprojected to be in a far higher
tax bracket, not because of anyextra income she's taken in,
but because of compressed taxbrackets.
So when you can start toillustrate this, when you can
start to see this, that's wherewe can start to understand how
might various conversionstrategies what if you fill up
the 12% tax bracket?
Filling up essentially meaningconverting.
(06:50):
How do you convert assets fromLuke and Mary's traditional IRAs
into Roth IRAs in a year inwhich they're under the 12%
marginal tax bracket?
Well, you can see that doingthis is going to be beneficial
to the tax adjusted endingwealth that they might have, but
it's not making that big of adifference.
Mary is still, even in thisscenario where they're doing the
conversion up to the 12% taxbracket.
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She's still expected to be in avery, very high tax bracket in
the future.
There's not been enough of amovement to get pre-tax assets
into Roth assets for that tomake too dramatic of an impact.
So you can start modeling out.
How would this change?
What happens if you do the 22%bracket?
Convert all assets from IRAs toRoth IRAs only to the extent
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that you're filling up the 22%tax bracket.
And once you start to do that,not only is Mary in this
instance saving a lot more money, so a lot more protection for
Mary, but what you can see is,if this was the projection, this
was her taxable income prior toconversions.
If I get rid of this and nowjust show, here's her adjusted
taxable income with theconversions, the impact that
(07:52):
that had is she's no longerexpected to cross into that much
higher tax bracket.
So the specific numbers for you, of course, will be much
different.
And, by the way, if you want tobe able to model out your
scenario with this tool, you canget access to this in the
Retirement Planning Academy.
Link is in the show notes below.
But the point that I want to getacross is, if all you're doing
is modeling out Roth conversionstrategies if you're married
(08:15):
while the both of you are living, that's a great place to start.
That's where you should start.
That's base case.
But as time passes and as youtry to see, how do we not just
optimize our tax strategy butalso implement a tax strategy to
protect a surviving spouse?
You must also be taking intoaccount how would this change if
one spouse were to pre-deceasethe other?
Those are the two ways that youshould be looking at this.
(08:37):
So that's number one.
First way that you can help toprotect your surviving spouse
against the widow's tax is toimplement the right kind of Roth
conversion strategy, not justlooking at what do you do when
the two of you are living, buthow would that change if one of
you were to pre-decease theother, especially if that were
to happen early in yourretirement?
The second thing that you cando to protect against the
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widow's tax is to maximize yoursocial security benefit.
Now, the way social securityworks is if one spouse
pre-deceases the other, thesurviving spouse has the option
of either collecting their ownSocial Security benefit or they
can collect the full amount ofwhat the deceased spouse was
collecting or would have beencollecting, depending on the
timing of when this happens.
Now, this doesn't actuallyminimize the tax hit of required
(09:21):
minimum distributions, like theRoth conversion strategy would,
but what it's doing is it'smaximizing the income.
So if a much bigger chunk ofincome is now being paid in
taxes when one spouse issurviving and the other is
deceased, well then at leasthaving a higher social security
benefit is going to provide astronger floor, a stronger base,
more income for that survivingspouse.
What you want to avoid is aninstance where all of your
(09:44):
income a big chunk of it is nowbeing paid in extra taxes due to
the widow tax and, by the way,the widow tax isn't an IRS name
of a tax, it's just what it'scalled.
When you say the compressed taxbrackets for the surviving
spouse in many cases are goingto be a lot more challenging to
deal with than they were whenyou're married jointly.
So how do you deal with that?
Well, you increase income inother places In retirement
(10:32):
no-transcript.
That's going to help protectthe surviving spouse because
it's a stronger, tax efficientincome floor that could
potentially offset some of theadditional taxes owed on other
assets.
So that's the second thing thatyou can do.
And then the third thing youcan do is understand how
different RMD tables come intoplay and how you can use them to
(10:55):
your benefit.
When we hear RMD requiredminimum distribution, we
typically think one simpleformula, or at least one formula
.
Maybe it's not simple.
That's not the case, though.
There are different lifeexpectancy tables that the IRS
allows you to use, dependingupon the situation.
You have the uniform lifetimetable, you have the single life
table and you have the joint andlast, survivor table.
(11:17):
So what's the difference andwhen should you use each?
Well, the uniform lifetimetable is going to be the one
that's most common.
That's the table where, if yousay, here's my IRA balance and
I'm at required minimumdistribution age, how much do I
need to start taking?
This is the table that the IRSsays if you're this age, here's
what we expect your lifeexpectancy to be and that's the
number you use to compare yourIRA balance and determine, or to
(11:39):
calculate, how much do you owein a required minimum
distribution for that year.
So that's the most common one,but there's two others.
The second is the single lifetable.
Now, typically, the single lifetable is being used if you
inherit an IRA from someonethat's a non-spouse.
So you had an uncle that passedaway, you had a parent that
passed away, they left you theirIRA.
The single life table is takinginto account both their date of
(12:00):
birth, their date of death,your date of birth to determine
the life expectancy or todetermine the required
distribution that you must takefrom that inherited IRA.
In many cases, a survivingspouse isn't going to use that
table A surviving spouse.
So, for example, if I were topass away, my wife would take my
IRA balance and it would justbecome hers.
It would roll over into herexisting IRA and when she turned
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the age at which she had tostart taking required
distributions, all of it wouldbe in one account, meaning all
of the balance of her IRA andwhat my IRA used to be while I
was still living.
That's the first one, theuniform table but in this case,
what we're talking about istypically it's used if you're
inheriting an IRA from anon-spouse, but there are some
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instances where my spouse mightelect that, even if I were to
pass away.
The first is if she's under 59and a half and she needs access
to the funds, so I pass away.
Today, my wife inherits my IRA.
If she were to roll that intoher IRA she can't touch it she
could, but she's going to pay apenalty on that, a 10% early
(13:03):
distribution penalty, becauseshe's not yet 59 and a half.
However, if she were to inheritmy IRA and she said you know
what?
James didn't leave me lifeinsurance, he didn't plan for
this, we don't have any money.
I need to tap into his IRAbalance what she would do is
actually keep the IRA separateand use this single life
expectancy table.
It would become an inheritedIRA with her as the beneficiary,
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and the reason for that is shewould now be subject to required
minimum distributions, but shewould not be subject to the 10%
early distribution penalty.
So that's where some strategicplanning comes into play of
ideally she wouldn't need toaccess this, but if she did,
this is one strategy that allowsher to access those funds
penalty free.
She still pays taxes, but noadditional 10% penalty, and she
(13:47):
can then access those funds withno penalty and use them for her
living expenses.
So that's one instance in whicha spouse might elect the single
life table as opposed to theuniform lifetime table.
The other is if the spouse whopasses away is significantly
younger.
So let's say I'm 75 and myspouse is 63 years old, she
passes away and she has an IRA.
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I could take her IRA and rollit over into mine, but I would
immediately have to begin takingrequired distributions from
that because that's now my IRA.
I'm 75.
I have to start takingdistributions from the entire
IRA balance because of my age.
However, if I elect the singlelife table and choose to elect
as a beneficiary IRA as opposedto move that into my IRA, I
(14:31):
don't have to begin takingdistributions until she would
have reached her requiredminimum distribution age.
So some strategy there aroundthis of depending on the age,
depending on the age gap, youmay want to potentially elect
that option.
And this just goes back to howdo you avoid that widow's tax,
how do you avoid getting crushedin retirement if you don't plan
(14:51):
correctly while you understandwhat options are available to
you to potentially minimize someof this tax impact?
And then a third part ofunderstanding these lifetime
tables is the joint and lastsurvivor table.
Where this comes into play isalso if I'm significantly older
than my spouse.
So let's go back to thatprevious example I'm 75, my
spouse is 63.
This is what we're both living.
This has nothing to do with oneof us passing, but when I
(15:13):
turned 75, I have to starttaking my required distributions
.
Now, if I was already 75, theywould have started at 73.
But just to use an example, ifI'm 75 and I'm taking my
required distributions, if I amtaking them based upon the
uniform life table, that's thestandard, that's what most
people are doing.
But what the IRS tells me is,if I'm more than 10 years older
(15:33):
than my spouse, I can begintaking required distributions
based on this joint lifeexpectancy table and because
she's so much younger, they givedifferent numbers they have to
take and actually minimizes therequired distribution that I now
have to take from my IRA, evenif we're both living.
The intention behind this issaying my IRA isn't just for me,
(15:54):
it's really for both of us, sothere's some leeway.
It's a lower required amount,which allows the IRA to be
preserved a bit more, becausethe IRS here is kind of
acknowledging the fact that it'snot just designed to support my
lifetime but also my spouse's,who's more than 10 years younger
than me.
So as you start to understandthese things, this is going to
help you when determining what'sthe best strategy to maximize
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what your portfolio can do foryou while you're both living.
But also, how do you start toput a strategy in place to
protect a surviving spouse?
So, with all these strategieswhether it's Roth conversions,
whether it's your socialsecurity strategy, whether it's
understanding what lifeexpectancy tables to use when it
comes to required distributionsthere are pros and cons to each
of them.
None of these is universal inits application.
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None of these is all good orall bad.
There is so much nuance andpros and cons that make sure
you're working with yourfinancial advisor to work
through some of these things.
Get the Retirement PlanningAcademy Again link is in the
show notes below if you want tomodel some of this out for
yourself.
But make sure you understandthese things so that you don't
go into retirement thinkingyou've got a great plan for you
and your spouse, only to haveone of you pass away prematurely
(16:59):
and have the surviving spouseaccept a much less ideal
retirement than they otherwisewould have had they planned for
this ahead of time.
But what?
These three things?
These are three things you canstart to implement into your
plan today to protect yourspouse for whatever happens
tomorrow.
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