How to avoid the ‘survivor’s penalty’ before a spouse passes

When a spouse passes away, the surviving partner faces potential tax implications if they switch to single filing status.

This is known as the “survivor’s penalty,” which can impact older women disproportionately.

One reason for higher taxes is the lower standard deduction and tax brackets for single filers compared to married couples.

Additionally, when the surviving spouse inherits individual retirement accounts (IRAs), they often face higher tax brackets, resulting in increased tax liability on required minimum distributions.

To mitigate these tax burdens, experts recommend taking proactive measures before a spouse’s passing.

One option is to consider partial Roth IRA conversions, which involve transferring a portion of pretax IRA funds to a Roth IRA for future tax-free growth.

This allows for upfront tax payments but can result in long-term savings due to lower tax rates.

Another important aspect is keeping account ownership and beneficiaries up to date.

Inheriting assets may result in a “step-up in basis,” where the asset’s value at the date of death becomes the new basis.

This can help reduce capital gains taxes for the surviving spouse.

Additionally, couples may consider designating beneficiaries other than the spouse for tax-deferred IRAs.

This can potentially reduce overall taxes paid on IRA distributions if the surviving spouse has sufficient savings and income.

It’s crucial to engage in tax projections and consultations with financial professionals before making significant financial changes.

By planning, survivors can minimize the financial impact of losing a spouse and ensure their long-term financial well-being.