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  • Writer's pictureStephen Boatman

Widow's Penalty: Problems and Solutions

Updated: 1 day ago

Most people don't know this but widows/widowers may pay more in taxes after the death of their spouse due to filing single instead of MFJ, social security is decreased, capital gains are partially stepped up, and there's often much to learn about managing finances if you weren't the one making the majority of financial decisions. Below, we will discuss what a widow's penalty is, how to plan for it, and how to prepare to make large financial decisions on your own.


What is The Widow's Penalty?


As discussed above the widow's penalty occurs when the surviving spouse has a drop in income and a tax raise simultaneously. The example below demonstrates this.


Both Spouses Alive:


A husband and wife are both 75 years old. He receives $40,000 in social security benefits, and his wife receives $20,000 in social security benefits. They also receive a $50,000 RMD (required minimum distribution) for a total income of $110,000. This means the couple has a taxable income of $55,850 after their standard deduction and Social Security tax adjustment. The total tax due for the year is $6,238.


Widow/Widower:


Assuming the husband dies, his wife will have her social security bumped up to $40,000 but overall receive $20,000 less than when her husband was alive. Her RMD will likely still be around the $50,000 number. However, she will lose $14,200 of the standard tax deduction and be taxed at a higher rate, causing her income of $90,000 to churn off a tax bill of $9,892. So not only will she receive $20,000 less in social security, but she will also be taxed $3,654 more as a single taxpayer than when filing jointly. This leads to a total income swing of -$23,654!


How to Decrease The Widows Penalty?


The first would be to delay applying for Social Security so there is a larger benefit to carry over upon death. They could pursue tax diversification while alive to have a healthy balance of Roth vs. Traditional IRA money to provide more tax flexibility in retirement. Also, in the year her husband dies, she can still file her taxes MFJ, meaning it may be a good time to convert some of her IRA dollars to Roth before her effective tax bracket increases as a single filer. If she responsibly pursues a roth conversion strategy it could decrease future RMD's, future tax brackets, and benefit from tax-free growth in her Roth.


There are some creative ways to continue to receive social security ILLEGALLY that I do NOT recommend, but this headline was too good to pass up.

Learning About Managing Finances as a Widow(er)


Managing finances is a simple task surrounded by complexity. If you are the primary decision maker and may pre-decease your spouse, it is best to start managing finances together or to have a trusted third party available, such as a financial advisor, to assist in decision making after death. However, if you aren't typically the decision maker and want to learn more about finances, I recommend a few books below.


Book Recommendations


The Psychology of Money

The Intelligent Investor

The Millionaire Next Door

How To Find a Financial Advisor


If you decide you want a trusted third party to be there to help guide you and your family now or in the future, I recommend looking for someone who is a fiduciary, has their CFP certification, and is fee only (not fee based). The amount they will charge ranges from typically 1% of the assets they manage to a flat fee of around $500/month. If your assets are over $600,000 you will likely pay less with a flat fee financial advisor and if they are under $600,000 you will likely pay less with a 1% of assets under management financial advisor. Also, you should ask them a few questions to clarify how they work and thankfully Jason Zweig wrote out "19 QUESTIONS TO ASK YOUR FINANCIAL ADVISER". I recommend reviewing those questions or bringing them with you before talking with an FA.


Closing Widow's Penalty


These strategies lean toward the complex side of things, and I recommend finding a financial advisor to assist you in preparing for this scenario and many others that could apply to your retirement. I hope you found the above information informative, and if you have any questions you'd like to discuss further with someone, feel free to call or email us. Have a great day, and don't forget to do something kind for yourself and, if you can manage it, someone else.


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