Losing a spouse is a difficult and life-changing event. But if you are retired, the death of your spouse can be financially devastating as well. There are several challenges you might face, especially if you lose your partner early in your retirement journey.
Widows and widowers whose spouses were younger than 72 at the time of death need to examine their options carefully before rolling over their spouse’s IRA. The typical route, and the default when a couple is close in age, is for the surviving individual to take the IRA as their own, simply rolling the assets in the deceased’s IRA into their own.
In this case, the surviving spouse would begin to take annual required minimum distributions in the year in which they turn 72. They would not be able to access funds without the additional 10% early withdrawal penalty until they reach 59 ½. This is ideal if you want to delay distributions, but it’s a potential problem if you need to access the funds in the account prior to 59 ½. It can be hard for a young widow or widower to identify potential future cash needs, especially during such an emotionally difficult time.
Another route is to take the IRA as a Beneficiary IRA. With a Beneficiary IRA, widows and widowers may access the funds in the account at any time without penalty. Typically, for Beneficiary IRAs with multiple beneficiaries (a spouse and non-spouse beneficiaries), the entire account must be fully distributed within 10 years. This is ideal to escape the early withdrawal penalty, but it can be a problem if you want to avoid unnecessary distributions.
There is an exception to the 10-year distribution timeframe. If the spouse is the sole beneficiary, and the deceased was younger than 72 at the time of death, the surviving spouse can forgo required minimum distributions until the year in which the deceased would have turned 72. But, the surviving spouse can still access the account if needed without penalty when rolled into a Beneficiary IRA. This is especially helpful when the deceased spouse was the younger individual.
Additional Planning Points
Four additional planning points that a widow or widower would need to take into consideration are described below.
Reduced Monthly Social Security Income
You will receive a one-time benefit of $255 upon the death of your spouse, followed by a monthly adjustment of your own Social Security benefit. You will receive the equivalent of the greater of the two current Social Security checks. This should happen quickly. In most cases, the funeral director will report your spouse’s death to Social Security. Reporting immediately is for your own good—because if you delay, you must return your spouse’s Social Security benefit for the month of death and any later months.
Potential for Reduced Pension Income
If your spouse had a pension, he or she may have selected a joint-and-survivor option. In that case, depending on the selection made, you would receive 25%, 50%, 75%, or hopefully 100% of the pension amount received by your spouse during his or her life. But without survivor benefits the pension stops at death.
Portfolio Shrinkage
You may find that your available assets have declined if your spouse had an extended nursing home stay and needed to use funds from their portfolio. This can be avoided with some advance planning in the form of long-term care insurance, purchased in your late 50s or early 60s.
Higher Tax Bracket
After your spouse has died and you have reclaimed some stability, ask your tax professional to prepare a tax projection for the year following the death. You can still file as married in the year your spouse dies, but typically in the year after the death, you will file as single. For 2021, the 12% tax bracket for single tops out at taxable income of $40,400. This can have a big effect on the amount of federal income tax you will pay. The unfortunate truth is that widows and widowers often have reduced income and increased federal taxes.
