Married-Death-Taxes

[akck]

I’ll have to admit that in all my planning for retirement, I never looked at what happens tax-wise when one of us dies in the future. I recently came across a YouTube video that discussed the topic. The main point was that it’s likely that taxes will go up for the remaining spouse. RMDs will be the likely cause pushing more income into a higher tax bracket as a single. Of course I immediately went to add being single to my taxes spreadsheet and confirmed that more tax would be owed as a single filer.

One of the suggestions made was to take distributions prior to RMDs being required, moving the funds to an investment account. We benefited from the WEP/GPO change, and as a result, we’ll receive a large refund on our tax withholdings. My thoughts are to do a partial Roth Conversion of one of our traditional IRAs to reduce this refund. We’ll likely continue to convert over the next few years before RMDs take effect.

In my original planning, it was a push whether Roth conversions made sense. In considering life after death of a spouse, it makes more sense to convert in order to reduce income as a single filer. Has anyone else considered doing this in their retirement planning?

 

[Koolau]

Yes, for several years, I've been w*rking on this. I Roth converted all my tIRAs and some of my 401(k). My back-of-the-envelope calculations show that, while DW will move into a higher tax rate, she will survive financially because we've planned for the "event" and we over saved.

Best luck with your planning and execution.

 

[WWDog]

YES! When I retired and my income dropped I started converting my retirement accounts to a roth account and paying up to the next tax bracket for several years to minimize taxes. A couple of years ago I split the roth between two accounts at different institutions to keep the lump sum federally insured.

 

[Gumby]

Minimizing taxes on the surviving spouse has always been a major consideration for Roth conversions.

 

[pb4uski]

.... In my original planning, it was a push whether Roth conversions made sense. In considering life after death of a spouse, it makes more sense to convert in order to reduce income as a single filer. Has anyone else considered doing this in their retirement planning?

Yes, the potential for a significant increase in taxes should one of us die prematurely was a factor in our decision to do Roth conversions.

Another thing to consider if your retirement is overfunded and you have heirs that you want to benefit from your wealth is to skip the spouse with part or all of your tax deferred money. IOW, if there is tax-deferred money that the spouse will never use, why have them have higher RMDs and taxes the whole time. Similarly, tax deferred funds donated to charity are not taxed and reduce RMDs.

 

[pb4uski]

.... A couple of years ago I split the roth between two accounts at different institutions to keep the lump sum federally insured.

You don't have to do that. You can have a single tax-deferred brokerage account and buy brokered CDs or US Treasuries. As long as you keep the amount of brokered CDs from any single bank less than the FDIC limits you are fully insured but can do so with a single account.

 

[jazz4cash]

In my original planning, it was a push whether Roth conversions made sense. In considering life after death of a spouse, it makes more sense to convert in order to reduce income as a single filer. Has anyone else considered doing this in their retirement planning?

When I evaluated doing heavy Roth conversions it was a push taxwise but I failed to properly account for two things. The 1st was how my Fidelity planner defaults to “significantly below market returns” (e.g. worst case). The portfolio growth under more typical markets would favor Roth conversions now. The 2nd miss is what you are describing here. I guess I thought losing one SS check would even things out but that was under worst case market returns. Now I have to figure out how to adjust my strategy. Thanks?

 

[aja8888]

When my wife died in 2022, my (our) SS income was cut in half (roughly) and my federal income tax doubled.

 

[APP01]

My DW and I evaluated a number of things when we were working on our estate and financial/tax plans if one of us died early. ROTH conversions were a big part of that. We also divided up some of our assets between us, including "some" things put in trusts to manage estate taxes.

A significant part of our investments are in tIRAs, so large RMDs, and with an early death, a huge tax bomb. I retired just over a year ago, and will not be taking SS until 70 in 5 more years.

Now that we have minimal income for the next 5 year, living mostly off laddered t-notes and muni-bond income, made sense to convert from the tIRA. Last year we started doing large ROTH conversions and will continue for the next 5 years doing this each year with taxes paid from our taxable. The exact yearly conversion amounts are a trade off between not crossing the next IRMAA threshold, and tax bracket.

For us this will make the RMDs, and early death more manageable.

 

[MarieIG]

Yes, absolutely, making Roth conversions for the benefit of the surviving spouse has been a priority for us.

 

[engineernerd]

When my wife died in 2022, my (our) SS income was cut in half (roughly) and my federal income tax doubled.

If you don't mind saying, what happened to your overall net income and your expenses?

I'm the one most likely to outlive my spouse, but I always assumed I would need less money as a single person than what we spend together, and that the reduced net income resulting from SS and tax changes would not outweigh the effect of having one less IPA lover in the household.

It's also true that tIRAs are a relatively small share of our assets compared to some here, so there is that.

 

[Exchme]

Roth Conversion planning requires a wholistic look at your financial situation, goals, fears, etc. For some, it doesn't matter at all and for others they can make big improvements in your terminal wealth (or allowable spend rate).

A long list of factors can have major effects:

-Size of tax deferred accounts
-Your other income
-Difference in age and life expectancy
-Heirs you care about and their tax rates
-Assumed growth rate of investments
-Charitable giving
-Need for ACA premium credits
-Asset allocation and location
-Unrealized gains in taxable your LTCG tax rate
-Future moves between states with different tax rates
-Future changes in tax laws

I admire folks' spunk in creating a DIY spreadsheet, but most of those are terrible (mine was), leaving out important chunks of the tax code. Even most of the supposedly detailed calculators are missing important bits or mess up if you hold assets in a tax efficient manner of holding bonds in tax deferred & stocks in taxable/Roth. I encourage folks to either use a good commercially available tool like Pralana (pralanaretirementcalculator.com) or hire a paid by-the-hour advisor to make a plan.

 

[engineernerd]

When I evaluated doing heavy Roth conversions it was a push taxwise but I failed to properly account for two things. The 1st was how my Fidelity planner defaults to “significantly below market returns” (e.g. worst case). The portfolio growth under more typical markets would favor Roth conversions now. The 2nd miss is what you are describing here. I guess I thought losing one SS check would even things out but that was under worst case market returns. Now I have to figure out how to adjust my strategy. Thanks?

I think if your only goal is to avoid outliving your assets then your Fidelity planner is on the right track. Only the scenarios in FIRECalc that show you running out of money before your assumed death actually matter. If you want to leave a legacy, that's different.

And again, it's probably a fair assumption that expenses will go down along with income when one spouse dies, but if your portfolio is too heavily weighted towards tIRAs maybe the two effects won't cancel each other out. Worth running some numbers, maybe.

 

[GrayHare]

Yes, Roth conversion can reduce future taxes. You did not mention children or other beneficiaries. If the projected future tax numbers look high, you might consider establishing a charitable trust or foundation.

 

[Sunset]

If you don't mind saying, what happened to your overall net income and your expenses?

I'm the one most likely to outlive my spouse, but I always assumed I would need less money as a single person than what we spend together, and that the reduced net income resulting from SS and tax changes would not outweigh the effect of having one less IPA lover in the household.

It's also true that tIRAs are a relatively small share of our assets compared to some here, so there is that.

A single person often (IMHO) sees some minor drop in expenses, but it's pretty small, just from my observations of relatives: house costs remain the same, grocery expense drops a little to maybe 60% but that is often small in overall expenses.

I just assume overall expenses will be 80% of the cost for a couple, with health care, groceries, and maybe losing the 2nd vehicle making up most of the savings.

Added costs will be home maintenance if hubby was handy, or extra restaurant meals if spouse did all the cooking.

Income remains the same for investments, but small SS disappears, and tax rates increase due to 1/2 the income level to the next tax bracket. So easy to pay higher tax rates.

 

[aja8888]

If you don't mind saying, what happened to your overall net income and your expenses?

I'm the one most likely to outlive my spouse, but I always assumed I would need less money as a single person than what we spend together, and that the reduced net income resulting from SS and tax changes would not outweigh the effect of having one less IPA lover in the household.

It's also true that tIRAs are a relatively small share of our assets compared to some here, so there is that.

We were both on SS (she was 77, me 79 at the time). No pensions, just savings (two IRA's one small Roth, one brokerage account). When she passed, her SS income went away. My IRA was 10 - 15 times her's in size and I was having to pull hefty RMDs (she was also pulling RMDs, but smaller). My expenses did not change much as I was still in the big house.

With my required RMD's, some interest income, and SS, I was now in the (single) 24% bracket, which was much higher than the 12% bracket we were in filing married, jointly. TAX BOMB!

So, in essence, my income is less, expenses stayed about the same (although that is better now) and being single pushed me into the higher tax bracket.

 

[engineernerd]

We were both on SS (she was 77, me 79 at the time). No pensions, just savings (two IRA's one small Roth, one brokerage account). When she passed, her SS income went away. My IRA was 10 - 15 times her's in size and I was having to pull hefty RMDs (she was also pulling RMDs, but smaller). My expenses did not change much as I was still in the big house.

With my required RMD's, some interest income, and SS, I was now in the (single) 24% bracket, which was much higher than the 12% bracket we were in filing married, jointly. TAX BOMB!

So, in essence, my income is less, expenses stayed about the same (although that is better now) and being single pushed me into the higher tax bracket.

Thanks!

Our two (non-mortgaged) homes aren't a big part of our cost of living. Currently our ACA premiums are (between the two of us we're paying over $26k a year for high-deductible HSA plans!), though that should end soon since we're only a couple of years away from Medicare eligibility. I think the tax bomb won't be too bad for whichever one of us outlives the other, but maybe sometime I will try running some numbers. I don't have a good feel for how the brackets translate to overall blended tax rates.

 

[marko]

Not trying to be glib, but seriously, if DW passed before me, my taxes going up would be massively offset by my/our spending going down dramatically. She outspends me by 5X mostly gifts to others.

 

[CaliKid]

I hope to heck my wife has the "problem" of too much income from too high of RMDs after I am gone!

 

[aja8888]

I hope to heck my wife has the "problem" of too much income from too high of RMDs after I am gone!

Lots of widows alleviate that problem by finding a new husband to help spend the money and reduce taxes!

 

[CaliKid]

Lots of widows alleviate that problem by finding a new husband to help spend the money and reduce taxes!

Happy wife happy l... oh well, happy wife anyway!

 

[N02L84ER]

Yes, the primary reason we are doing and have done Roth conversions is because of the increased taxes upon the death of the spouse.

 

[akck]

One thing I like about this forum, is that I get confirmation of my realizations, meaning I’m not off base on my thinking. I’d like to thank all members for their input and hopefully this thread will help others in their retirement planning.

For my plan, I’ll be converting our traditional IRAs to Roths as tax brackets allow. Future RMDs, not needed for living expenses will go into a taxable investment account. Hopefully, everything will be converted over the next 5 years.

 

[jldavid47]

I was just watching a video on this subject earlier today:

 

[Koolau]

Lots of widows alleviate that problem by finding a new husband to help spend the money and reduce taxes!

Heh, heh, friends with (financial) benefits.