Married-Death-Taxes

[omni550]

Heh, heh, friends with (financial) benefits.

In SW Florida, I meet a LOT of rich widows. In fact, some have been widowed 3 times! And they are only in their late 60s/early 70s.

omni

 

[akck]

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

Yes! That’s the one I saw.

 

[Stormy Kromer]

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

I got really sick last year and started thinking about when I'm gone. I was working out examples for DW and came up with the same example.....crazy. DW will have less income and more taxes when I'm gone....home expenses won't change much.

Hard to die efficiently these days.

 

[Sunset]

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.

I actually consider it worth while to leave some in IRA/401Ks, as the RMD on say $300K will not be too large ($12K), and most importantly, with age comes larger medical expenses. It can become a form of LTC insurance, as the money used for a few years of nursing home expenses ($125K/yr is easy) can offset the extra withdrawal from IRA to pay for it. Resulting in a near 0% tax rate for much of the withdrawal.

Would be a shame to pay 24% getting it all converted, and then not be able to use the huge medical deductions later.

 

[Koolau]

In SW Florida, I meet a LOT of rich widows. In fact, some have been widowed 3 times! And they are only in their late 60s/early 70s.

omni

I think I'd steer clear. Ever heard of "black widows?"

 

[Koolau]

I got really sick last year and started thinking about when I'm gone. I was working out examples for DW and came up with the same example.....crazy. DW will have less income and more taxes when I'm gone....home expenses won't change much.

Hard to die efficiently these days.

Yet another reason I'm keeping my "old" insurance policies current. When I kick, DW will have a significant chunk of cash to help avoid or at least pay taxes. I'm in contact with a nice lady who is showing me how to pay extra so that my universal policies will not lapse too soon. I have enough stuff wrong with me that DW is very likely to win this lottery eventually. The proceeds of the policies are not taxable, so win-win-lose (I'm the loser, but whatchagonnado?)

 

[Koolau]

I actually consider it worth while to leave some in IRA/401Ks, as the RMD on say $300K will not be too large ($12K), and most importantly, with age comes larger medical expenses. It can become a form of LTC insurance, as the money used for a few years of nursing home expenses ($125K/yr is easy) can offset the extra withdrawal from IRA to pay for it. Resulting in a near 0% tax rate for much of the withdrawal.

Would be a shame to pay 24% getting it all converted, and then not be able to use the huge medical deductions later.

Yeah, it's a balancing act - and the rules change from time to time.

 

[pb4uski]

.... 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! ...

Not to pick on you aja8888, but I think your situation is fairly typical. I know in my case even if one of us dies and RMDs are taxed at 24% we still come out ahead because when that income was deferred we avoided paying 28% federal and ~6% state. So even if 24% federal and 0% state we are still ahead by 10%.

And that was the whole idea from the beginning... we deferred income to save taxes then while presuming that we would be in a lower tax bracket in retirement and that has worked our just as we planned.

And if it ends up that your tax bracket in retirement is higher than when you deferred the income then you have been much more financially successful than you expected to be when you deferred that income, so that is good.

 

[aja8888]

Not to pick on you aja8888, but I think your situation is fairly typical. I know in my case even if one of us dies and RMDs are taxed at 24% we still come out ahead because when that income was deferred we avoided paying 28% federal and ~6% state. So even if 24% federal and 0% state we are still ahead by 10%.

And that was the whole idea from the beginning... we deferred income to save taxes then while presuming that we would be in a lower tax bracket in retirement and that has worked our just as we planned.

And if it ends up that your tax bracket in retirement is higher than when you deferred the income then you have been much more financially successful than you expected to be when you deferred that income, so that is good.

I'm really not complaining, just stating what happened. I had no real opportunity to convert much to a Roth before she died as when we were working, the taxes on the conversions were in the 24% range anyway. Pay now or pay later, I guess.

I have reduced my living expenses dramatically now and really don't mind paying my fair share. Actually, I am building cash each year with my fixed income investing over and above my actual spending. Plus, at almost 82, I have everything I need and weekly golf is my only real splurge.

 

[aja8888]

I think I'd steer clear. Ever heard of "black widows?"

I have met several "rich widows" after 2+ years after losing my DW and as far as I am concerned, they can stay that way. I don't need a new set of problems!

 

[Coaster4Now]

As a surviving spouse, I wish we had done more Roth. But it is what it is.

I'm not at RMD age, but am withdrawing and converting to a reasonable (single) tax bracket.
I figure it needs to be taken out sometime, might as well be now in a low tax bracket, that I can control.
Plus the Roth funds will allow me the option to pay for 'lumpy' expenses without going into higher brackets/IRMMA etc.
At least that's the plan - how it will work out, shrug.

 

[CRLLS]

What I overlooked when considering Roth conversions is the survivor's new tax bracket as previously mentioned. Not only will they likely in a higher tax bracket, but the IRA suffers from forced RMDs which again increases the tax burden. Sure, that tax has to be paid, if not by the survivor, by the beneficiary. If not converted, a married beneficiary gets that tax benefit, so much the better IMO.

I learned too late about the added benefits of converting. Oh well, as Old Ben Franklin said: 'Life's tragedy is that we get old too soon and wise too late.' Looking on the bright side, at least we get to grow old.

​

 

[Coaster4Now]

....... I know in my case even if one of us dies and RMDs are taxed at 24% we still come out ahead because when that income was deferred we avoided paying 28% federal and ~6% state. So even if 24% federal and 0% state we are still ahead by 10%.

And that was the whole idea from the beginning... we deferred income to save taxes then while presuming that we would be in a lower tax bracket in retirement and that has worked our just as we planned.

And if it ends up that your tax bracket in retirement is higher than when you deferred the income then you have been much more financially successful than you expected to be when you deferred that income, so that is good.

It can be looked at in many ways - a lot has to do with personal situations. So very many unknowns and different calculations. And it depends what stage in working life you are at.

One thing I look at is, yes, if you were in a higher tax bracket when contributing to a TIRA and are in a lower retirement say, 24% tax bracket when you withdraw it, yes a win.

However, you are also going to pay taxes on the earnings the the TIRA gained.
So it's not exactly a cut and dried amount of tax savings.

If you had converted some to a Roth, paying the taxes at 24%, all earnings going forward would be tax free.

To me, it's moving money from one pocket to the other.
Both are invested - and once the taxes are paid on the converted amount - nothing converted including future earnings are taxed.

(Until they change the change the tax laws)

 

[pb4uski]

.... However, you are also going to pay taxes on the earnings the the TIRA gained.
So it's not exactly a cut and dried amount of tax savings.

If you had converted some to a Roth, paying the taxes at 24%, all earnings going forward would be tax free.

To me, it's moving money from one pocket to the other.
Both are invested - and once the taxes are paid on the converted amount - nothing converted including future earnings are taxed.

(Until they change the change the tax laws)

It is a popular misconception that there is a benefit from growth. There isn't.

Let say the tax rate is 20% both now and later and that you have 100 of tax deferred money, and that money doubles every 10 years.

Option A: Do nothing. Your 100 doubles to 200 and you withdraw it, pay 40 in tax and have 160 left to spend after paying the taxman.

Option B: Convert to a Roth. You convert and pay the 20 of tax from the withdrawal, leaving 80 in the Roth. Over 10 years the 80 doubles in value to 160 and you have 160 available to spend.

So the growth doesn't really provide any benefit... the only benefit is tax rate arbitrage.

Now if you have taxable account money to pay the taxes the growth of the Roth gives you a small benefit. Same assumptions except you also have 20 of taxable funds.

Option A.: Your 100 IRA doubles to 200. The 20 in taxable account grows to 35 (it doesn't double because you need to pay taxes on the growth each year). You withdraw the 200, owe 40 in taxes which is 160 plus you have 35 in the taxable account for a total of 195.

Option B: Convert to a Roth. You convert and pay the 20 of tax from the taxable account, leaving 100 in the Roth. Over 10 years the 100 doubles in value to 200 and you have 200 available to spend.

In this scenario, converting results in a small advantage of 5.

However, if you are ER and in a lower tax bracket now than you will be after any pensions or SS start, then it is better to take advantage of today's lower rates to avoid having to take RMDs at the future's higher rates.

 

[Tadpole]

My husband died in 2022. And yes, with RMDs still going for two, my taxes are much higher. Non-investment income down 30%, taxes up 50%, IRMAA doubled. I think I have previously called it the Widow Penalty.

 

[Coaster4Now]

I pay my taxes on conversions from taxable.
In your example, the tax rates are the same and I agree with you, not much difference.
But they are not in my case.

Yes, different scenerios lead to different results, I agree.
I'm speaking from my situation, it makes sense.

Since this is sort of a conversion thread...
Once someone goes from MFJ to single the taxes do change more significantly and there's more of an advantage to a Roth.
And there's benefits in growth for heirs, which again, works out in my case.
And it gains me flexibility to take expenses from whatever pot I want.

I'm not converting all, as I see benefits for health care in my TIRA,
but I also see benefits for a mix.
Everyone is different - and as situations change, so can plans.

I'm in a lower tax bracket now then I will be with RMDs, even with SS.

 

[pb4uski]

I pay my taxes on conversions from taxable.
In your example, the tax rates are the same and I agree with you, not much difference.
But they are not in my case. ...

I added an example where the taxes are paid from taxable funds... the benefit is slight if the tax rate is the same... it is just avoiding having to pay tax on the growth of the taxable account money because with a Roth conversion the taxable account money ends up in the Roth and growth on it isn't taxed.

 

[Coaster4Now]

I added an example where the taxes are paid from taxable funds... the benefit is slight if the tax rate is the same... it is just avoiding having to pay tax on the growth of the taxable account money because with a Roth conversion the taxable account money ends up in the Roth and growth on it isn't taxed.

Thank you, I saw that.
But the tax rate is not the same-in my case and in many cases.
So yes, if you are both alive, ok, works.

As a side note, my taxable isn't just my brokerage, which is still earning ok.
It's my piggy bank checking account

It's a complicated thing, but life changes can make you wish you had done more in Roth, and I'm just playing catch up while in a lower tax bracket.

 

[Dash man]

It is a popular misconception that there is a benefit from growth. There isn't.

Let say the tax rate is 20% both now and later and that you have 100 of tax deferred money, and that money doubles every 10 years.

Option A: Do nothing. Your 100 doubles to 200 and you withdraw it, pay 40 in tax and have 160 left to spend after paying the taxman.

Option B: Convert to a Roth. You convert and pay the 20 of tax from the withdrawal, leaving 80 in the Roth. Over 10 years the 80 doubles in value to 160 and you have 160 available to spend.

So the growth doesn't really provide any benefit... the only benefit is tax rate arbitrage.

Now if you have taxable account money to pay the taxes the growth of the Roth gives you a small benefit. Same assumptions except you also have 20 of taxable funds.

Option A.: Your 100 IRA doubles to 200. The 20 in taxable account grows to 35 (it doesn't double because you need to pay taxes on the growth each year). You withdraw the 200, owe 40 in taxes which is 160 plus you have 35 in the taxable account for a total of 195.

Option B: Convert to a Roth. You convert and pay the 20 of tax from the taxable account, leaving 100 in the Roth. Over 10 years the 100 doubles in value to 200 and you have 200 available to spend.

In this scenario, converting results in a small advantage of 5.

However, if you are ER and in a lower tax bracket now than you will be after any pensions or SS start, then it is better to take advantage of today's lower rates to avoid having to take RMDs at the future's higher rates.

If you convert to a Roth you are likely avoiding some future taxes from NIIT and IRMAA. So there can be significant savings by growing investments in a Roth vs a tIRA.

 

[SecondCor521]

I just added an item to my "Reasons (not) to get married" document regarding tax complexity. As a (currently) single, it's nice not to have to deal with the various complexities that MFJ folk do.

 

[djsander]

Ours went in at a higher tax bracket than we are now. We will convert in the currently lower bracket as long as possible. Can’t tell what the future will bring but eventually one of us will be in a higher bracket or we could just be there by RMDs. My wife has a lower amount and is 5 years from RMDs and I’m 10 years. We probably didn’t do the best in optimization, but we have a good pile of money and the wife doesn’t like to spend. It’s actually not a bad problem to have.

 

[jollystomper]

...

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, this is what we are doing. We have converted all of DW's tIRA to Roth. My 401k +tIRA will still have large balancves even with the conversions done between now and my age 73. But I am not complaining, I danced to the music, eventually I have to pay the piper . Between my SS survivor benefit, my pension survivor benefit,RMDs, and investment income, the survivor of us will likely have twice the taxable income we have today at a higher tax rate. It will also trigger Medicare IRMAA. But I have also calculated that the increased IRMAA and taxes will still leave either of us in "savings" mode.

My bigger concern is (a) simplifying our finances so that DW can handle them with little or no assistance when I am gone, and (b) making her very aware of the family/friends/men seeking "romance" who may be looking to go after the money she will have. That is a "tax" I do not want her to pay .

 

[RetMD21]

My husband died in 2022. And yes, with RMDs still going for two, my taxes are much higher. Non-investment income down 30%, taxes up 50%, IRMAA doubled. I think I have previously called it the Widow Penalty.

Were you paying IRMAA for 2 before?

 

[Coaster4Now]

....
My bigger concern is (a) simplifying our finances so that DW can handle them with little or no assistance when I am gone, and (b) making her very aware of the family/friends/men seeking "romance" who may be looking to go after the money she will have. That is a "tax" I do not want her to pay .

Ah ha, worried about men looking for 'A Nurse with a Purse'?

I couldn't resist commenting on this, as there has been some Black Widow references previously.
It goes both ways.

 

[jollystomper]

Ah ha, worried about men looking for 'A Nurse with a Purse'?

I couldn't resist commenting on this, as there has been some Black Widow references previously.
It goes both ways.

She is still mistaken for being 10-15 years younger than her age, so they may be looking for "A Honey with Money". Just in the past two weeks men have struck up conversations with her at the local senior center and at a funeral repast when I have not been present, along the lines of "what is a pretty woman like you doing at a place like this?" I kid her that she needs to "dress down" for these events when I am not around .