While life insurance can provide replacement for lost income if a spouse dies earlier than expected, there is another hidden financial burden that may arise when a spouse passes away: potentially higher taxes.
Have you reviewed what your taxable income would be now and in retirement if your spouse were to pass away? If your spouse has a pension and/or a retirement account (IRA/401k/TSP) subject to Required Minimum Distributions (RMDs), you could be at significant risk of the “Widow’s Penalty”.
The Widow’s Penalty is when a surviving spouse must begin paying taxes as a “single” filer after the death of their significant other. When both spouses were alive, they would normally file as “married filing jointly”, enjoying more favorable tax brackets. When one spouse dies, a tax burden may arise for the surviving spouse. This is because in most cases, the remaining retirement income of the surviving spouse does not decrease by half as one might expect, and the surviving spouse is potentially put into a much higher tax bracket as a “single” filer. This can add a large financial burden to an already emotionally stressful situation.
Tax planning and efficient retirement distribution planning are critical elements to making sure you are minimizing the risk of this potential penalty that is “baked” into our tax code. Since women typically outlive men by 5-10 years on average, this penalty often affects women the most.
If you do not have a strategy to address this issue, you could potentially be facinga significant amount in unnecessary taxes if your spouse predeceases you!
Our team of Fiduciary Financial Advisors are happy to discuss how these issues might affect your financial strategy and help you navigate the opportunities available to you! We offer in-depth forward-looking tax planning strategies using advanced software.
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All the best,
The PlanVest Federal Team
Disclosure: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult our professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Investment Advice offered through PlanVest Financial Inc., a Registered Investment Advisor firm.