Transcript

[00:00:00] Intro: Welcome to Retirement Unlocked with Larry Heller, Your life, your way, unlimited possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode

[00:00:20] Bill Tucker: Welcome back to Retirement Unlocked with Larry Heller.

Losing a spouse is emotionally overwhelming, and many surviving spouses are surprised to learn that it can also create financial and tax consequences. In this episode of Retirement Unlocked, Larry discusses the often overlooked widow/widower tax penalty, why taxes can increase dramatically after the loss of a spouse, and the key planning strategies that surviving spouses should consider to protect their retirement income, Medicare premiums, investment, and estate plans.

This episode focuses on proactive planning, helping couples and surviving spouses avoid [00:01:00] the costly mistake during one of life’s most difficult transitions. And it is a difficult transition, Larry. This is, this is a tough one, and, um, a lot of people probably would just as soon not have this conversation.

But as you’re about to make really clear, it’s important that you start now.

[00:01:20] Larry Heller: Yes. When I say now, it’s before one of the spouses passes away. Yes. So because a, a lot of retiree, retirees assume that taxes will go down after one spouse passes away, but in reality, tax brackets become less favorable. The income– Your income may remain relatively high.

Uh, your deductions may decrease. Your Medicare premiums could rise. Um, your investment and estate decisions kind of now fall on one person. Mm-hmm. So the surviving spouse can end up paying significantly more taxes on the same or even lower income. They, uh, it… Whether [00:02:00] you call it a single penalty or if you’re married, that you, you get a, a little bit of discount, but the brackets start, um, at a much, uh, lower threshold when you’re single than when you are married.

[00:02:13] Bill Tucker: Well, yeah, ’cause I think a lot of retirees assume that taxes will go down after one spouse passes away, but apparently this widow/widower tax penalty is a real bear waiting in the woods for people.

[00:02:26] Larry Heller: Yeah, so I mean, after one spouse passes away, one, your Social Security could go down because you’ll lose one of the Social Security.

You’ll end up with a higher am-amount. But, um, other than that, your income may stay the same because the same investments, most of m-the money, if it’s going to the, to the, um, surviving spouse, the income is gonna st-stay the same unless maybe you had a pension and so forth. So your… H- The higher taxes could apply even at much lower income levels as your status will change from married [00:03:00] filing jointly to single, and the tax brackets are compressed substantially for single versus married.

[00:03:07] Bill Tucker: Yeah, and I think a lot of people don’t think about that. They think, well, you know, they’ve been filing jointly, married filing jointly for so long, they don’t remember that- Individuals actually go into a different t- tax bracket entirely, and those rates will increase. And I guess that’s part of what amounts to this widow, widower, widow tax penalty that you’re talking about.

[00:03:29] Larry Heller: Yeah. And there’s some other things that y- your, um, IRMA, um, taxes- Mm … your IRMA premiums could go up, go up. What I mean by that is when, when you’re retired and you’re on Medicare, um, so you have to pay a premium, that could go up. We’ll talk a little bit more about, you know, about that. Um, your, you know, your standard deductions maybe, um, will be higher when you’re married versus when you’re, when you’re single po- possibility.

Uh, [00:04:00] better capital gain thresholds. So there’s a, a, a few different things that the married couples will benefit than when there’s only one spouse, they’re gonna get either penalized or they’re gonna have to pay, you know, pay more. So when you’re, when you- the year of the death, just to be clear, in the year that you die, you can still file, file married filing jointly, but after that you’re usually filing single.

[00:04:24] Bill Tucker: Uh, talk about the retirement accounts problem that, that exists for couples because assume, assume, I would assume most couples come into you and, you know, they’ve got a, a couple of different, uh, sources of income that are coming into them, uh, and both from, from different spouses.

[00:04:43] Larry Heller: Yeah. So, um, so IRAs, um, and 401plans, when you’re both, you know, both alive and you eventually have to take a required minimum distribution, you have to pay income on that.

So, and now with the required minimum distribution being pushed back [00:05:00] to age 75 if you’re born in 1960 or, or later, if you’re born before that to age 73, you may have a long time before you’re taking money out of these, uh, retirement accounts. And the balance, especially if you’ve done well in the market ha- ha- could have substantially increased.

So now when you have to take required minimum distributions out, it’s at a much m- higher number. Um, and if you’re looking at it when you’re both married, wh- when you’re married and both spouses are alive, you’re gonna pay less taxes than if one’s single. So you’re withdrawing the same amount of… Assuming both spouses are the same age, one dies, the other…

That gets rolled over to the surviving spouse, and now when that surviving spouse hits the required minimum distribution age, they’re taking out the same amount as when they were married, but they’re taxed higher on it. It may not seem fair, but that’s just the way, that’s just the way that, way that it is.[00:06:00]

[00:06:00] Bill Tucker: Wow. That is, that, that is tough. So what about some of the opportunities, or planning opportunities before you’ve lost your spouse in here? Is there, uh, uh, Roth conversions- Yeah … on the table or what, what’s, what are we looking at?

[00:06:12] Larry Heller: Yeah. Absolutely. So now you wanna kinda look at when you first retired and maybe not taking Social Security, what tax bracket are you are now, and then do some planning on seeing what tax bracket you could be in when you’re taking required min- minimum distributions.

Um, and if there’s a big, especially if there’s a big difference in age between one spouse and the, and the, and the other, the younger spouse may have more, more time, longer times to accumulate money in, in the, in their retirement accounts. So they may be in a higher tax bracket because they’re possibly could be a widow at that particular time.

So looking at the Roth conversions now versus the Roth conv- um, your income now with Roth conversions versus your taxable income later on, just one thing to look at and see if it [00:07:00] makes sense. Um, it also made sense, it may make sense to do some partial withdrawals from your retirement accounts while both spouses are alive because you’re getting to use the more favorable joint tax bracket.

So, uh, so there are planning opportunities, uh, before a widow, before widowhood that you kind of want to take a look at, um, and, and possibly don’t, you know, possibly don’t lose them. We- we’ve had people that have, you know, come in and they’re, now they’re required minimum distribution, but for the last five or six years they’ve been in such a low tax bracket, but no one’s ever said to them, “Well, take a little bit out, pay a little bit in taxes now to, to-” Mm.

prevent paying a lot more in taxes later on.”

[00:07:43] Bill Tucker: Oh, yeah. That… And, and, and would it be, make sense maybe in some cases, depending on the people involved, that in addition to the required minimum distribution, maybe they take a little bit extra on top of that? Is that kind of what you’re talking about?

[00:07:56] Larry Heller: Yeah, that’s what I’m…

Well, maybe not on top of it, maybe instead [00:08:00] of or a combination- Okay … of both. So really looking at the, looking at the brackets, maybe you fill up your 12% bracket now when you’re married, you can put more away because that limit on the 12% bracket is higher when you’re married than when you are single. And looking at, at a possible bracket, you could be in 24 or 30, um, percent bracket later on because your in- your required minimum distributions will kick you into a much higher bracket later on.

So does it make sense to take some out at 12% versus paying at- Um, 24 or 30, or 30. Again, every situation is, um, uh, uh, is unique, so you have to look at it and see what makes m- makes sense. And w- we run a lot of these numbers and a lot of these strategies and a lot of these game plans to see if it makes sense to do a Roth conversion or take some money out of the IRA at a lower bracket.

W- well, one, you’re married, but by two, you’re in a, a lower tax [00:09:00] bracket.

[00:09:00] Bill Tucker: You know, you mentioned an acronym that has become my least favorite acronym, IRMAA. And, and we did, we did, two ep- two episodes ago, uh, we did do an, uh, you did an excellent explainer podcast talking about IRMAA, what it is, and the impact that it has.

But, uh, you know, talk a- talk about it in this kind of situation, in this particular case.

[00:09:21] Larry Heller: Yeah. So IRMAA is the income-related monthly adjustment a- amount that you have to pay on your Medicare- Yeah … premiums. So if you’re paying ame- your Medicare premiums, you know, now I think, I think it’s somewhere around $200 and $90 for, uh, I don’t know what it is for the Medicare Part D.

But, um, but your Medicare Part B and your Medicare, which is your hospital, uh, uh, zation, your Medicare Part D premiums for your drugs, um, is based upon your income. Mm-hmm. And a lot of people don’t realize this. Um, so your … If, if you’re [00:10:00] married, it’s based upon your married num- uh, um, limits. So just like your tax brackets- Yeah

your Ir- your IRMAA limits are, uh, are, are higher when you’re married than you are when you’re single. So if you pass, pass away, um, and you’re paying Medicare, your, the amount that you have to pay for Medicare may increase even though your income has stayed the same, because now it’s based upon a single filer, which is much lower than a married couple.

Yeah. So your income could go down, your taxes could go up, and now your Medicare premiums could go, go up. So, so you wanna take a l- you know, take a look at that. Not that there’s much you can do about, uh, about this. Um, watch episode 199. Yeah. There’s a couple things we talk about in there. So, uh, so your required amou- distributions could affect your IRMAA.

One-time income eve- events can affect IRMAA, [00:11:00] um, capital gains, Roth conversion timing. So a lot of things that you wanna kinda do to ki- do that. And no matter what, and I don’t care how much money people have, they despise, they loathe paying higher IRMAA amounts.

[00:11:16] Bill Tucker: Oh, yeah.

[00:11:16] Larry Heller: Um, you know, sometimes we, we, we, we, we’re making investment decisions and we’re saying, “Well, we gotta, you gotta make some diversifications dec- decisions, um, and it’s gonna be higher in taxes.

And yes- It may increase your IRMAA, but we need to do it from the investment standpoint and, and from a tax standpoint they kind of get it, but they hate doing IRMAA. And the last thing you wanna do is not to explain that to a client up front, because if you, if they don’t realize this

So, uh, so knowing what that is [00:12:00] and knowing that that could, you know, that, that could go up la- la- later on.

[00:12:04] Bill Tucker: Yeah. Yeah. It’s not Larry’s fault, everybody. It’s the government. They always want their money and they always want more of it, it feels like. What about Social Security? How’s that impacted when a, when a spouse passes away?

[00:12:17] Larry Heller: Yeah, so, uh, again, you know, wh- when one spouse passes away, um, you’re gonna lose one of the Social Securities. You will, will, well, the survivor gets to keep the larger of the two benefits. So again, your Social Security could go down, your taxes could go up, your IRMAA, your Medicare premiums could go up. So there’s kind of three things that, that government’s hitting you with, tax penalty, tax pena- tax penalty for being a widow, penalty for higher Medicare premiums if, if, if you’re a widow.

Some people wanna look at it that you get kind of a discount if you’re married, but so l- l- the Social Security, your income could go [00:13:00] down that you’re receiving from Social Security, but maybe your taxes need to, and will go up. So planning about that, coordinating that, looking at the survivor benefits, looking at your retirement plan if one person would pass away to see if it ha- would have an impact is very important.

[00:13:17] Bill Tucker: What about estate and planning issues, Larry?

[00:13:21] Larry Heller: Yeah. So when, a, a lot of times when we- we’re looking at this, there’s a lot of different documents that you need to be a- be aware of: power of attorney, healthcare proxies, uh, trusts, your, whether you have a revocable or irrevocable trust, your wills, your beneficiary designations, your asset titling.

All those ti- time, all those things come into play when one spouse dies. Well, they will, but it’ll be a lot easier if you’ve discussed this and you went over these documents while both spouses were, both spouses were alive. A lot of times where we see that one spouse, [00:14:00] typically the man, handles everything.

Yeah. And doesn’t even get the, the wife involved, and then when the wife pa- when the husband passes a- away, the wife is just overwhelmed with everything that has to get done, especially in an, an emotional timeframe. So the more that you can discuss, the more that you can plan, the easier it will be for that surviving spouse.

[00:14:24] Bill Tucker: What about beneficiaries? I know that it’s like I occasionally go rev- and re- review my beneficiaries to make sure that they’re sort of, uh, uh, you know, updated and, and still accurate. Do you, do you, do you find that you need to encourage people to do that?

[00:14:39] Larry Heller: Yeah, I mean, there’s really two things that we want to take a look at.

We want to take a look at the bene- you know, the beneficiaries, and we’ve seen Ex-spouses named as beneficiaries. We’ve seen missing children. We’ve seen minor children named as beneficiary. All things that you, you don’t wanna ha- wanna have happen. Yeah. Um, and after one person dies, it’s kind of too late.[00:15:00]

It’s already been, been named there. So you want to, like you said, you want to review the beneficiaries every so often, making sure that they are still the way that you want it to be handled. And then also asset titling. Um, you know, we’ve seen these revocable trusts set up, uh, and then a lot of times the assets weren’t changed to title to the revocable trust, so nothing goes through them.

So, you know, making sure that this is done, organizing them, upda- updating your estate documents can, you know, simplifying all these decisions while both spouses are alive. I mean, one of the things that we do, one of the benefits, is really getting everything into a computerized vault where everything’s there.

Um, b- both spouses know exactly where, where it is, and if one passes away, the other one can really have a clear understanding. Um, and if both passes away, we can then turn this on to the, to the executor, a lot of times the, the, the children o- o- of that. But waiting and not [00:16:00] having a, a spouse really understand what’s going on can be totally overwhelming, not only from an emotional standpoint, but in a financial standpoint.

Um, and one other thing, for those of you in, in, in New York State, that the, the New York State estate tax, without going through this, um, is, is not portable. What do I mean by that? Well, while we speak, the, the estate exemption is $7.35 million. Um, so if you do proper planning, you can protect $14 million, but if you don’t do it w- before the first spouse passes away, you can lose $7 million o- of exemption.

In other words, if all the money was in one spouse’s name and the other spouse’s dies, there’s not a portability, so you can’t protect $14 million. So really making sure how the assets are titled properly in New York State can be [00:17:00] significant, especially ’cause they have what’s called the cliff tax, which it could be taxed from dollar one.

That could be a whole nother, nother podcast, but really making sure that that’s done properly.

[00:17:10] Bill Tucker: Well, that point makes a really obvious point, which is simply you need to plan. You need to be doing this planning before the crisis moment happens.

[00:17:23] Larry Heller: Yeah, absolutely. You, you wanna talk about the tax strategies, you wanna talk about where the assets are held, what the income sources are, their estate wishes, um, healthcare decisions, all things that you wanna do ahead of time so when you’re going through this tr- traumatic, um, time in your life, um, that, that you’ve already had all these conver- you know, conversations.

Yeah. Um, and then you also wanna talk about kinda what, what happens to, you know, some of the planning things. Should we do Roth conversions now? What happens to the income if one s- survive? Will they survive to have enough cash flow? Running retirement planning and showing [00:18:00] how taxes could change. Like we mentioned, updating the beneficiary d- designation, and really having that surviving spouse knowing where everything is.

Um, and w- we’re pretty adamant, you know, that we wanna have both spouses here, even if the, the, the one spouse doesn’t really wanna really know the, the minutiae of the financials- Yeah … and the finances, just knowing that they have an advisor here that can kinda hold their hand a- a- at a critical time to guide them through all these decisions.

[00:18:31] Bill Tucker: Can you give us a couple of real-life scenarios, Larry, that you’ve encountered in your practice that, that, that will help people understand why this is so important?

[00:18:42] Larry Heller: Yeah. We’ve talked about it kind of a, you know, a little bit in, um, uh, in generality, but, you know, w- we’ve had, you know, people, one spouse passes away and they’ve had a couple million dollars in IRAs, um, they had a pension, which now is gonna be half ’cause they had [00:19:00] joint and survivor at 50%.

They, they had two Social Security checks. So now what happens, one spouse, may- a lot of times it’s the husband ’cause men pass away, um, earlier typically. Yeah. Um, they, they’re gonna have RMDs, and again, the required minimum distribution could be at a higher, um, tax bracket, like we talked about. Uh, Social Security, one of it goes away.

The single, the surviving spouse is gonna file as, as a single. Medicare premiums are gonna rise due to IRMAA. So planning on this and really kinda doing some things ahead of time so, you know, to minimize possibly the taxes that are gonna, you know, that are gonna be, gonna be paid by doing some of the strategies such as Roth conversions or partial IRA withdrawals and some tax bracket management.

[00:19:49] Bill Tucker: Yeah. Well, you know, and, and it, you know, it’s a really emotional disturbing time for most people when, when, uh, you know, they [00:20:00] lose a spouse. And, you know, I would imagine it becomes even worse when you come in and you’re a spouse who’s, you know, not really used to making the financial decisions. And, and, and this kind of, this could, this could all be a little overwhelming, I could see.

[00:20:16] Larry Heller: Yeah, absolutely.

[00:21:10] Bill Tucker: All right, Larry, as we get to the end of this episode, why don’t you wrap this up and put a bow on it for us?

[00:21:15] Larry Heller: Yeah. So just to summarize, um, the loss of a spouse can create unexpected increases in taxes. Uh, the single surviving tax brackets are less favorable.

The IRMAA thresholds, the, that you pay on your Medicare costs could go up. Mm-hmm. Um, the larger retirement accounts, or the same retirement accounts, but now could cause higher tax burdens later on. Um, planning to make sure that you do possibly Roth conversions or proactive tax planning and making sure all your estate and beneficiary reviews are done while you’re both alive and give them in order are critical.

So preparing before a crisis can tremendously reduce stress and [00:22:00] save money and costly mistakes.

[00:22:02] Bill Tucker: Absolutely. And that is the single best argument that anyone could possibly make And listeners, you know, thank you for listening to Retirement Unlocked.

If today’s episode helped you better understand the financial and tax challenges surviving spouses can face, please like, subscribe, and share this episode with someone y- who you think may benefit from this conversation. And if you’d like help reviewing your retirement income strategy, tax planning opportunities, estate plan, or survivor planning con- considerations, consider a complimentary 20-minute call with our team.

And I’ve noted it before, but I’m gonna tell you again. Remember, Heller Wealth Management is now a part of Savant Wealth Management. Savant is a registered investment advisor. This content is provided for informational and educational [00:23:00] purposes only and should not be construed as personal investment advice.

Thanks for listening