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Thought leadership series
What is the Widow's Penalty - and can you do anything about it before retirement?
Is the widow’s penalty real, and can you do anything about it before retirement? Yes, unfortunately, it’s real. And also yes. You may be able to plan for it to reduce the impact. The Widow’s penalty basically means that when one spouse passes away, the surviving spouse can eventually find themselves paying a lot more taxes on less household income. Less income. But more taxes. Why? Because you go from Married Filing Jointly to Single. Your standard deduction gets smaller. Your tax brackets get tighter. But a lot of the taxable retirement income may still be there. Especially if you and your spouse have built up significant balances in traditional IRAs and 401(k)s, those accounts can eventually create substantial required minimum distributions, or “forced” income that will now be taxed at a higher rate. Planning ahead can make a difference. The years before RMDs begin can be an opportunity to strategically convert some of those traditional retirement dollars to Roth. Yes, you will pay taxes on the roth conversion today. But you're potentially shrinking future taxable RMDs and reducing the amount of taxable retirement income a surviving spouse may eventually have to deal with. If you're approaching retirement with significant IRA or 401(k) balances, you definitely want to run these scenarios to see if it’s better long term to pay some of the tax now or wait. This is one of those tax planning conversations worth having well before RMDs begin. Everyone’s situation is different. So be sure to check with your CPA or advisor to see how this might impact you. #RetirementPlanning #TaxPlanning #RothConversion #WidowsPenalty #FinancialPlanning
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