Few people think about this – and I wish I could be the smart guy that thought of this for this post, but I wasn’t[i]. It’s something called the widow’s penalty tax; it affects the surviving spouse.
After a spouse’s death, the survivor usually goes from a joint return to filing as a single filer, usually resulting in an increase in the survivor’s tax bracket. This happens because often the survivor’s income can be almost as much as they were filing when using a joint return – Bingo! – a large tax bill. One advisor’s client went from a 24% bracket (filing jointly) to a 32% bracket as the survivor[ii]
How to protect yourself?
A series of partial IRA conversions (to Roth IRAs) over several years, keeping the amounts low enough not to change your tax bracket, can help. Do this after age 59-1/2 but before taking Social Security benefits. The distributions will avoid the 10% penalty and, at the same time, take advantage of the low joint rate. By the way, it’s worth mentioning that the current tax law, which has lower brackets than prior law, sunsets in 2026, meaning brackets are set to return to their previous higher rates. Another benefit: the conversions will reduce your taxable income when you are forced to begin your required minimum distributions (RMDs) after age 70-1/2.
Good idea, huh?
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.