Minimizing the ‘survivor’s penalty’ before a spouse’s death

Losing a spouse is a challenging experience, and for many older women, it can bring an unexpected financial burden: higher taxes. The financial implications of losing a spouse can be daunting, but there are strategies that can help prepare for the future.

In 2022, data from the Centers for Disease Control and Prevention showed a 5.4-year life expectancy gap between men and women in the U.S., with women generally outliving men. This disparity often leads to what is known as a “survivor’s penalty” for older married women, resulting in higher taxes in the future.

One of the main challenges for widows is the transition from filing taxes jointly with their deceased spouse to filing as a single individual. This change can lead to higher marginal tax rates due to differences in standard deductions and tax brackets.

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The standard deduction for married couples is higher than for single filers, which can result in increased taxes for widows. Additionally, changes in individual tax brackets can further impact the amount of taxes widows may owe.

One way to mitigate the impact of higher taxes is to consider partial Roth IRA conversions. This strategy involves transferring part of pretax or nondeductible IRA funds to a Roth IRA for future tax-free growth. By spreading out these conversions over several years, widows may be able to minimize overall taxes paid.

Another important consideration for widows is managing investment accounts and ensuring that ownership and beneficiaries are up to date. Failing to plan properly could result in missed opportunities for step-up in basis, leading to higher capital gains taxes.

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Furthermore, if a surviving spouse expects to have sufficient savings and income for the rest of their life, they may consider naming beneficiaries other than their spouse for tax-deferred IRAs. This strategy can help reduce overall taxes paid on IRA distributions, but it’s essential for nonspouse beneficiaries to understand the withdrawal rules for inherited IRAs.

Navigating the financial implications of losing a spouse can be complex, but with careful planning and the guidance of financial experts, widows can take steps to prepare for the future and minimize the impact of higher taxes. By being proactive and exploring strategies like partial Roth conversions and careful management of investment accounts, widows can secure their financial well-being in the years to come.

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