If you’re married, it’s astir definite that 1 of you volition outlive the other—perhaps by galore years. What are the fiscal implications? Here are 10 issues to support successful mind:
1. Social Security. For a joined couple, their Social Security benefits tin dwell of 2 workers’ benefits oregon a worker’s payment and a spousal benefit. On the decease of either spouse, the remaining payment is the higher of the 2 benefits. For instance, if a idiosyncratic had a $2,000-a-month payment and the spouse had $1,000, upon the decease of either spouse the survivor’s benefit would beryllium $2,000 a month.
What if the surviving spouse isn’t yet property 62, which is usually the earliest property astatine which you tin get status benefits? There’s the anticipation of claiming arsenic aboriginal arsenic property 60. The surviving spouse tin take to cod either subsister benefits astatine property 60 oregon his oregon her ain payment arsenic aboriginal arsenic property 62. If the surviving spouse takes the second option, helium oregon she tin postpone subsister benefits, leaving the monthly magnitude to summation up until his oregon her afloat Social Security status property of 66 oregon 67. The reverse strategy is besides possible—claiming subsister benefits archetypal and past aboriginal swapping to the spouse’s ain benefit.
2. Pension benefits. The 2 astir communal pension payouts are “single life” and “joint and survivor.” Many couples take the little joint-and-survivor payout truthful that, upon the decease of the worker, the income for the surviving spouse doesn’t decline. If “single life” is chosen and the idiosyncratic dies first, the surviving spouse could perchance suffer each pension income. Because the consequences of opting for “single life” are truthful severe, the spouse indispensable typically springiness written support and get his oregon her signature notarized.
3. Income annuities. Since immediate annuities are a benignant of pension, choosing “single life” oregon “joint and survivor” has akin consequences.
4. Life insurance. Financial planners often accidental beingness security is unnecessary if determination are nary longer children astatine location oregon erstwhile a mates is retired. But immoderate retirees opt to support their beingness security truthful they person a excavation of tax-free assets to backmost up their pension oregon annuity choices. For instance, the spouse with a pension mightiness take the higher “life only” payout and past hedge the hazard by purchasing beingness security connected his oregon her ain life. What if the different spouse dies first? At that juncture, the surviving spouse mightiness opt to debar aboriginal premiums by canceling the beingness security policy.
5. Tax complaint differences. On the aforesaid full taxable income, joined couples are taxed little severely than azygous taxpayers. Similarly, the standard deduction for joined couples is treble that for azygous filers. The upshot: If 1 spouse dies but the household income remains the same, the surviving spouse mightiness look overmuch steeper taxation bills.
6. Medicare. Basic Medicare premiums are charged per person, truthful the decease of 1 spouse leaves the surviving spouse paying the aforesaid premium. Still, the subsister could extremity up paying acold much acknowledgment to IRMAA, oregon income-related monthly accommodation amount, which is the Medicare surcharge levied connected those with higher incomes. In 2021, IRMAA kicks successful astatine $176,000 successful modified adjusted gross income for joined couples, but conscionable $88,000 for azygous individuals.
It whitethorn beryllium intolerable to debar IRMAA surcharges—which tin scope from $860.40 to $5,502 a twelvemonth successful combined other premiums for Medicare Part B and Part D—if the surviving spouse is near with a ample sum successful accepted status accounts and is taking required minimum distributions. One portion of bully news: Withdrawals from Roth accounts aren’t included successful the IRMAA calculation.
7. IRAs. Surviving spouses tin rotation their deceased spouse’s status relationship into their ain IRA, assuming they’re listed arsenic the account’s beneficiary. But that isn’t needfully the champion strategy: If the surviving spouse is younger than property 59½, helium oregon she should astir apt dainty the relationship arsenic an inherited IRA. That way, the surviving spouse volition person the flexibility to retreat assets without paying the 10% taxation penalty.
8. Roth conversions. Converting a accepted IRA to a Roth is much compelling erstwhile some spouses are live due to the fact that the full taxation on, say, a $20,000 conversion should beryllium little than it would beryllium for a azygous individual. An added bonus: After the archetypal spouse dies, these earlier Roth conversions volition effect successful little required minimum distributions (RMDs) for the surviving spouse—and those RMDs could mean large payments to Uncle Sam due to the fact that they’ll beryllium taxed astatine the higher complaint for azygous individuals.
9. Health savings accounts. If a spouse is named arsenic beneficiary of a wellness savings account, helium oregon she tin proceed to payment from the account’s tax-free growth. That isn’t existent for nonspouse beneficiaries. Instead, for nonspouse beneficiaries, the relationship instantly becomes afloat taxable upon the decease of the owner.
10. Step-up successful basis. Upon the decease of a spouse, the assets held successful the deceased’s sanction get a step-up in outgo basis, frankincense nixing immoderate embedded capital-gains taxation bill. If the assets are held jointly, determination is simply a step-up successful ground connected fractional of the assets—unless it’s a community property state, successful which lawsuit each jointly owned assets whitethorn person the afloat step-up successful basis. The step-up successful ground affects some taxable relationship investments and existent estate, but not status accounts.
James McGlynn, CFA, RICP, is main enforcement of Next Quarter Century LLC in Fort Worth, Texas, a steadfast focused connected helping clients marque smarter decisions astir long-term-care insurance, Social Security and different status readying issues. He was a mutual-fund manager for 30 years. James is the writer of Retirement Planning Tips for Baby Boomers. Check retired his earlier articles.
This file primitively appeared successful Humble Dollar. It was republished with permission.