Can Your Retirement Tax Planning Strategies Benefit the Surviving Spouse?

By Eva

Planning for the days after retirement with your spouse is always great, but have you ever thought what will happen if anyone of you suddenly becomes single. The death of your spouse after retirement often causes a sharp fall in the total income although the expenses do not drop much, posing severe financial challenges to the surviving one. Therefore, it’s better to consider such unfortunate circumstances in advance and shape the tax strategies for retirement in such a way so that both of you can lead a comfortable without the fear of outliving your savings if one passes away.

Know the Spousal Rules

Since Individual Retirement Accounts (IRAs) are not included in a will, you need to add the beneficiary name in the form so that the surviving spouse becomes entitled to its benefits. The beneficiary may also include your ex-spouse. Therefore, it is essential to know the choices the surviving spouse can make.

 Benefiting from an IRA:

If the first spouse had already started drawing Required Minimum Distributions (RMDs), keeping the inherited IRA would be a wise decision for the surviving one. In this case, the RMDs are calculated by the deceased spouse’s age, which eliminates the 10 percent early withdrawal penalty if the surviving spouse is below 591/2 years. For Roth IRAs, the beneficiary has to withdraw RMDs, even though the deceased partner had not done it. However, the spouse named as a beneficiary may have to shell out some money an account of income taxes. 

Rolling over the assets:

Only a surviving spouse can roll the assets of another spouse into his or her personal IRA. It is not subject to any income tax, or early withdrawal fee provided the surviving spouse is at least 591/2 years old). The surviving spouse is not required to pay any penalties if the assets remained in an account for five years. However, the rolling over should be


the same type of IRAs. It means a traditional IRA should be rolled over into another traditional IRA and a Roth into another Roth.

Converting to Roth IRA and converting to cash:

 If the surviving spouse has chances to stay in high tax brackets in future, turning the traditional IRA to a new Roth IRA would be a smart move provided you pay all taxes at that time. This way, you are not required to pay any more taxes in the future. The spouse can convert the IRA into cash if he or she is less than 591/2 years of age, although it will be subject to all the taxes applicable at the time.

Changes in income tax:

Depending upon the option the surviving spouse has chosen, income tax is subject to change. In case, the surviving spouse has selected the roll over option, all the deferred income taxes will be considered as deferred until any withdrawal is made. The same rule holds true when the IRA or 401(k) becomes part of the deceased spouse’s A or B Trust. When it is part of the A or B trust, the surviving partner will need to take minimum RMDs, which is computed over the life expectancy of the survivor.

Tips to Reduce Taxes for a Surviving Spouse

If you have lost your spouse of late, here a few tips to help you reduce your taxes:

Opt for joint return on the year of spouse’s death: You can file a joint return as a couple even in the year when your spouse passes away to enjoy favorable tax rates and the highest standard deductions. Also, you can claim a full exemption for your late partner that year.

File as a qualifying widow for next two years after spouse’s death: If you have a dependent child with you, file for the next two years after spouse’s death as a qualifying widow or widower. It will allow you to use the joint-return rates.

Get a head-of-the-household status from the third year: From the third year of your spouse’s death, you can file the returns as head-of-the-household (if you do not marry again) as it will keep the tax rates more favorable than a single taxpayer status. You will enjoy an increased standard deduction and a reduced tax rate than an individual filer.

A few critical things are often ignored during the demise of a spouse. By ensuring future financial security and implementing the right tax strategies for retirement, you can protect your late partner’s income. It is crucial that the money gets into the right hands. And, always consult a financial advisor to avoid penalties. 

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