- Retirement Accounts: Spousal Beneficiary or Roll Over
- Tax Considerations for the Widow
- Social Security Benefits for Widows and Widowers
- Insurance for Widows
The widow’s professional team, often made up of a financial advisor, tax professional and an estate planning attorney, can be key to her long-term success. For a new widow stricken with grief, but now responsible for everything, her professional team can help her navigate the ever-changing tax and estate laws while taking advantage of existing financial, tax and legal strategies.
Financial and tax rules have changed over the past few years. Social Security (SS) claiming strategies are more restrictive than they were 10 years ago, but still require planning to maximize a widow’s lifelong SS benefits. The SECURE Act (informally known as Secure Act 1.0), adopted as law in December 2019, changed how many beneficiaries will need to manage inherited retirement accounts. Barely two years later, in January 2022, the “SECURE Act 2.0” was signed into law, affecting the options for how a widow is to treat the retirement account she inherits from her deceased spouse. IRS tax code from the 1970’s and earlier, is still on the books, resulting in the expiration or reduction of several valuable tax strategies at the end of the same year in which the first spouse passes away.
Waiting to Make Financial Decisions May be a Mistake
To benefit the widow, some of these time-sensitive strategies require making big financial decisions. Unfortunately, friends, family and even professionals are too often telling the widow to NOT make any big financial decisions for at least one year. While well-intentioned, these people simply do not know what they don’t know. A widow following their advice can jeopardize her financial security or lose tens or even hundreds of thousands of dollars through uncollected benefits, unnecessary taxes, overlooked financial strategies or consuming assets at an excessive pace. The previous sentence is so important, an entire full-length post will be dedicated to it soon.
Let’s take a brief look at the status of retirement account rules, the Secure Act 1.0 and 2.0, a few tax strategies, Social Security survivor benefits and various insurance coverages as they impact a widow. This is by no means a comprehensive list of issues, but it does cover a good portion of the more important ones. Future posts will go more in-depth with each section below and discuss additional retirement issues not found in this post.
Retirement Accounts: Spousal Beneficiary or Roll Over
When your spouse passes away you want to confirm that you are the beneficiary of your spouse’s retirement account. The many rules involved with multiple beneficiaries and retirement accounts is beyond the scope of this post.
There are three options for dealing with your spouse’s IRA or 401k (or other retirement plan):
1. Roll your deceased spouse’s IRA or 401k over to your own retirement account. By choosing this option, the money and/or investments stay inside a tax-deferred account, meaning income taxes are deferred until you make withdrawals from your account.
If you are dealing with a 401k, you might have the option to keep your 401k with the same 401(k) provider. Here are a few considerations and facts related to rolling your spouse’s IRA to your own IRA or your spouse’s 401k to your own 401k or IRA:
- Rolling your spouse’s IRA or 401k to your own IRA makes sense if you are:
- past the age of 59 ½ which eliminates the early withdrawal penalty on distributions or,
- younger than 59 ½ and have other assets or sources of income to rely upon for living expenses without needing to tap into your IRA.
- RMDs are an IRS requirement to force you to take a certain minimum distribution each year, whether you need the money or not. Since these are “minimum” distributions, there’s nothing stopping you from taking larger distributions.
- The RMD starting date, known as the Required Beginning Date (RBD), has changed three times the past 4 years and it’s in the law to change a 4th time for those born in certain later years. If you were born:
- Prior to June 30, 1949 your RMD age is 70 ½.
- July – Dec 1949 or anytime in 1950 your RMD age is 72.
- In 1951 through 1959, your RMD age is 73. Caveat: If your 72nd birthday is anytime in 2023, you are not required to take an RMD in 2023! Skip it if you don’t need the money or take it if you do.
- In 1960 or later, your RMD age is 75!
- If you do not have other assets or sources of income to rely upon, a beneficiary IRA allows you to take distributions whatever your current age and there are no early withdrawal penalties.
- If your spouse did not reach RMD age, you can wait until they would have reached RMD age before starting distributions from your inherited IRA. Calculations are then based on the deceased spouse’s age, not yours. This is beneficial if you are older than your deceased spouse.
- If your spouse had reached RMD age prior to passing away, the Secure Act 2.0 will give the surviving spouse two distribution calculation options:
- Effective in 2024, the first option allows the surviving spouse to be treated as the deceased spouse. This option allows the surviving spouse to use the deceased spouse’s age and the more advantageous Uniform Lifetime Table to calculate RMDs. This option should benefit the surviving spouse if they are older than their deceased spouse and use of the Uniform Lifetime Table is a benefit over using the Single Life Expectancy Table (see next).
- The second option is for the surviving spouse to use their own age and life expectancy factors from the Single Life Expectancy Table. This may benefit the surviving spouse if they are much younger than their deceased spouse, but using the Uniform Lifetime Table (first option, above) may still provide a bigger benefit. Analysis is required.
- Net Operating Loss (NOL) carryover
- Capital loss carryover
- Passive activity loss carryover
- Charitable contribution carryover
- Retirement Benefit – Is the SS retirement benefit earned by you based on your wages over your lifetime. This is what most people think of when they say they are collecting Social Security. In SSA lingo this benefit is referred to as a Retirement Insurance Benefit (RIB).
- Spousal Benefit – Is the SS benefit you qualify for based on your spouse’s wages earned during their lifetime. If you also worked, you may have your own Retirement Benefit, and if you are married, you may also have access to a Spousal Benefit (but you can’t collect your full retirement and full spousal benefits at the same time; they don’t get added together for a benefit larger than either one of them). In SSA lingo this benefit is referred to as a Spouse’s Insurance Benefit (SIB).
- Survivor Benefit – Is the SS benefit you qualify for based on your spouse’s wages earned during their lifetime and due to their death. Based on your spouse’s earnings, you may be able to collect a spousal benefit while they are alive or a survivor benefit if they are deceased. You can’t collect both a spousal and survivor benefit at the same time. In SSA lingo this benefit is referred to as a Widow(er)’s Insurance Benefit (WIB). Children of the deceased parent may also be eligible to collect a Survivor Benefit.
- Widow’s Pension – This is not a separate benefit. It’s just another name for the Survivor Benefit (above). Many people and many articles use this term, Widow’s Pension, but it’s not the correct term and can create confusion
- In most situations, a widow must be married for at least nine months before they can collect a survivor’s benefit on their deceased spouse’s SS record. But there are exceptions to this rule.
- The widow who remarries before age 60 (50 if they are disabled) cannot collect a survivor’s benefit or will have her survivor’s benefit stop if already started.
- If the widow starts collecting a survivor’s benefit and then remarries at 60 or older (50 or older if disabled), there is no loss of the survivor’s benefit.
- If the widow was formerly married to an ex-spouse for at least 10 years, the ex-spouse dies, and the widow is not currently married, she may qualify for survivor’s benefit based on the deceased ex-spouse’s SS earnings record.
- If you are a common-law spouse and live in a state that recognizes common-law marriage, you should be eligible for a survivor’s benefit. In our state, Arizona, common-law marriage is not recognized and so a surviving partner would not be eligible for a survivor’s benefit.
- Age 60 – Is the youngest age a widow (or widower) can collect SS survivor benefits. If the SS Administration considers the widow disabled, she may collect survivor benefits as early as age 50. Starting the survivor benefit at age 60 will result in a reduced benefit; typically 71.5% of the full survivor’s benefit. The amount of the full survivor’s benefit is often equal to the amount of retirement benefit the deceased spouse was collecting. However, if the deceased spouse started their retirement benefit early (prior to their FRA), and the widow starts collecting a survivor’s benefit prior to their own FRA, the amount received may be less than, the same or more than what the deceased spouse received (it’s complicated!). Remarriage and/or raising young children can also affect certain survivor benefits.
- Age 62 – This age has nothing to do with a widow’s benefit. However, it is the earliest age that an eligible person can start their own SS retirement benefit or collect a spousal benefit. Collecting your own retirement benefit or a spousal benefit does not affect what you will receive in survivor benefits. Survivor benefits are calculated completely separately.
- Age 65 – The Full Retirement Age (FRA) for those born prior to 1938. FRA is the point where an individual can collect 100% of their own retirement benefit. For those born in 1938 or later, your FRA will range between ages 65 and 67, in two-month increments. If you were born in 1960 or later, your FRA is age 67. Here’s the chart to determine your FRA. As a widow, your survivor’s FRA might be different than your retirement FRA by up to four months.
In either case if you are younger than your spouse, rolling his retirement account to your IRA allows you to start Required Minimum Distributions (RMDs) later, based on your age, not his.
If your spouse was required to take a minimum distribution and he passed away prior to taking any or all his RMD for that year, you must first take the remaining amount of his RMD from his IRA before rolling his IRA to your own IRA. Most times the account custodian will catch this and not allow you to roll the IRA without first taking the RMD. If his RMD is missed and his IRA is rolled to your own IRA, you will still need to take his remaining RMD, but now it will come out of your IRA.
If your spouse’s employer rolls his 401k account over to your own 401k account and you keep this 401k account with the employer, make sure you understand your available investment options. Some 401k plans have very limited options.
2. Roll your deceased spouse’s retirement account to an inherited IRA (aka Beneficiary IRA). This assumes you are the beneficiary of his retirement account. Several rules surround this decision, which we won’t go into here. Here are a few considerations and facts related to inheriting an IRA from your spouse:
Rolling your spouse’s retirement account to an inherited IRA for you doesn’t lock you in to keeping this account as an inherited IRA forever. Later, if it makes sense, you can update your inherited IRA to an IRA owned by you, sometimes as easily as making a phone call to the account custodian. If you are younger than your spouse, changing your inherited IRA to your own IRA allows you to delay RMDs until you reach RMD age, which currently is 73 and changes to age 75 in the future.
3. Roll a portion of your husband’s retirement account over to your own IRA and roll the remaining portion to an inherited IRA with you as beneficiary. This is a combination of the first and second options. This might be a better solution to meet your unique financial needs. Analysis is needed for such a split.
Tax Considerations for the Widow
Qualifying Widow or Head of Household?
If you normally filed taxes as Married Filing Jointly (MFJ) and your spouse dies, you may be eligible to file taxes under the Qualified Widow category.
Eligibility for Qualified Widow status requires that you have a dependent child under your care and you must not be remarried. Meeting these requirements allows you to use the Standard Deduction for Married Filing Jointly, which is larger than the Standard Deduction for Individuals or Head of Household. Using a larger deduction may lower your tax liability.
In the year your spouse passes away, you will continue to file as Married Filing Jointly. The next two years, as long as you meet the above requirements, you file as Qualifying Widow and receive the same Standard Deduction as if you are filing MFJ. For 2023 this provides an additional $13,850 in deductions.
Tax Basis (aka Cost Basis) in taxable accounts.
When a spouse passes away, all the property owned by them is valued on that fateful date, the Date of Death (DoD).
For those with investments that have grown over the years and are held in taxable accounts such as Individual, Joint, Community Property and Revocable/Living Trust accounts, there is an adjustment made to some or all the appreciated investments. The adjustment process is known as “stepping up the tax basis” or doing a “step up in cost basis”. A step up in cost basis is not made to investments inside retirement accounts such as an IRAs or 401k. This process involves adjusting the tax basis of those taxable investments.
For example, if your spouse bought 1,000 shares of a company stock for $10 a share in 2005 and now those shares are worth $100 each, there is a $90 gain in each share. If all of those shares were sold prior to your spouse passing away, the gain of $90 times 1,000 shares results in $90,000 of capital gains. Taxes due on realizing those gains might result in a tax liability of $18,000. Let’s say the Federal rate is 15% and let’s use 5% for state, so a total of 20% of the gain. An $18,000 tax bill is something to be avoided or minimized if possible.
If those same shares were not sold but continued to be held in your Trust account or Community Property account (here in Arizona), most likely 100% of those shares, all 1,000, will have a step up in basis to the value of those shares on the Date of Death. If that value is $100 per share, your basis is no longer $10 per share, but $100 per share. Now if you sell 1,000 shares at that $100 price, your gain is zero, not $90,000. Because of the step up in basis, you can sell those shares for little or no capital gains. Of course, if you hold onto those shares and they later grow to $140 per share, selling them will result in $40 per share of recognized gain, or $40,000 if all 1,000 shares are sold. That’s much better than realizing $130,000 of gain.
If these investment shares are held in a Joint account, your estate planning attorney or tax advisor may only allow half the shares, the half that legally belonged to your spouse, to get a step up in basis. The other half of the shares, those that legally belong to you, keep their original $10 cost basis per share. Selling any of “your” shares at $100 per share unfortunately results in realizing $90 of gain per share, not zero. This is one of the downsides of using the Joint account. The better answer, here in Arizona and perhaps in other community property states most likely is to hold your investments in a Community Property account or Trust account. Aside from Arizona and a handful of other Community Property states, the majority of states follow Separate Property law.
Time Sensitive Tax Strategies.
Upon the death of a spouse, having your tax advisor or financial advisor review your recent tax returns can be very valuable. Some beneficial items on those tax returns, known as carryovers, may expire at the end of the year in which your spouse passed away. These carryovers are:
For example, if your husband ran a business as a sole proprietor and racked up some sizeable losses, your tax return might show these as Net Operating Losses (NOLs). Most likely ALL of the NOLs will expire at the end of the year in which he passed away. NOLs can be a very valuable tool when evaluating tax strategies. In your case, maybe there’s an IRA that could be converted to a Roth IRA and using those NOLs to offset the income of that conversion resulting in little to no tax cost to you. That’s if you make the conversion that year. Waiting until next year and those NOLs have expired and the Roth conversion costs you lots of taxes or you decide the tax cost is not worth it.
If you do have any of these carryovers, it’s important to look for tax strategies that will benefit you. But waiting too long or being told to “not make any big financial decisions for a year” can result in losing these opportunities.
Widow’s Property Tax Exemption.
In Arizona, the state provides an exemption to widows, widowers and disabled individuals. Widows and widowers must have annual income less than about $35,000 and a home with a market value of approximately $400,000 or less (Assessed Value of $28,459 as of 2021). These criteria change year to year. If the widow meets these requirements, her property taxes could be reduced by up to $3,000. With children under the age of 18 in the household, the annual income limits increase.
Social Security Benefits for Widows and Widowers
Let’s clear the air with some specific definitions so we are all using the same sheet of music. Regarding Social Security (SS) benefits, there are several terms we need to understand:
We’ll use the term “survivor’s benefit” throughout this section of the post to refer to a widow’s Social Security survivor benefit.
2. Am I eligible to collect a survivor’s benefit (widow’s benefit)?
Refer to the chart above for a general idea whether you are eligible for a survivor’s benefit or not. Additional details are below:
3. At what age can I collect the widow’s benefit and how much will I receive?
Let’s review the Social Security Timeline depicted above, specifically for the widow’s benefit:
Waiting to start a survivor’s benefit until your survivor’s FRA should result in the widow receiving 100% of the benefit received by the deceased spouse. If the deceased spouse had not yet started their own retirement benefit and was past their own FRA, the widow should receive the amount their deceased spouse would have received had they started their benefit in the month they passed away. This assumes, again, that the widow waits until her survivor’s FRA to start a survivor’s benefit. Delaying the start of your survivor’s benefit beyond your survivor’s FRA provides no larger benefit to you.
To clear up another common point of confusion, the widow does not collect multiple Social Security benefits. She will collect the higher of any eligible benefit. If the deceased spouse was the lower wage earner, the surviving spouse may already be collecting a higher benefit than can be expected from a survivor’s benefit.
The need to plan. Rushing to the SS office to claim your survivor’s benefit can be a large financial mistake. My hope is that this section shows the complexity of Social Security. Planning and analysis is needed. Claiming benefits early when other sources of income are available, could cost you hundreds of thousand of dollars over your lifetime. Learn more about Social Security Planning for Widows.
Insurance for Widows
For widows near or in retirement, there are a few key insurance coverages that may or may not be needed. These include health, life and long-term care insurance. Let’s look at each type of coverage.
Health Insurance for Widows and Widowers.
If you are under age 65 you don’t yet qualify for Medicare. You may be employed by an employer offering health insurance. If not, perhaps your spouse was working for an employer offering health insurance. In this case you may have coverage through COBRA which is offered to a widow and dependent children for 36 months after the employee retired or passed away. If your spouse was already retired, enrolled in an 18-month COBRA period and passed away during this coverage, the COBRA coverage should be extended from the to a 36-month period if the beneficiary notifies the COBRA administrator within 60 days of the death. If this 60-day notification is not made, extension to a 36-month coverage period may be denied. COBRA is expensive as you are required to pay the full cost of the health insurance premium plus a few extra percent to cover administrative costs. However, if you like the plan coverage and you have your medical network already in place, it can be comforting to know the coverage and network is still intact.
If you are under age 65 and there is no employer health insurance and no COBRA coverage, you will most likely need to look for an Affordable Care Act (ACA) plan through the Federal Government’s Health Insurance Marketplace at HealthCare.gov or your state’s health insurance marketplace. ACA plans are expensive but you may qualify for subsidies. Consult with a healthcare specialist to determine which plan is best for you and your family.
Your financial advisor should know of a reputable healthcare insurance specialist who can educate you.
Once you reach age 65, you are eligible for Medicare. There are two paths to choosing Medicare.
1. Original Medicare – an á la carte option, made up by combining Medicare Part A, Part B, Part D and perhaps a Medicare Supplemental policy.
Part A is hospital insurance and this part of Medicare is normally free for most people age 65 or older. Part B is medical insurance currently costing about $165 per month and it helps to pay for doctors and other healthcare providers. Part D is a prescription medication plan with premium costs averaging about $32 a month. Parts B and D premiums can be higher if your income exceeds certain thresholds. This addition to premiums is known as the Income-Related Monthly Adjustment Amount (IRMAA). Medicare Supplemental plans are often referred to as “Medigap”. Depending on which Medigap plan you choose – the most common plan is known as Plan F – it does what the name implies and covers the some or all of the gaps in Medicare Parts A, B and D. Current Medigap Plan F premiums can range from $150 to $400 a month per person. Adding all these pieces together can get expensive!
2. Medicare Advantage Plan – Some call it Medicare Part C because it’s thought of as a Comprehensive plan that rolls Medicare Parts A, B, D and a Medigap plan into one.
The two most common types of Medicare Advantage plans follow the HMO and PPO models. The less common Medicare Advantage plans are the Private Fee-for-Service plan and the Special Needs plan. Some of the HMO type Medicare Advantage plans have very low monthly premiums and a few may even have a zero monthly premium.
Choosing between Original Medicare and Medicare Advantage depends on how much flexibility you want, your preferred network, whether you want included dental, vision and hearing care and if you do a lot of traveling.
Life Insurance for Widows and Widowers.
For the widow, life insurance should be considered in two situations. First, if any family member is dependent on the widow’s financial resources and that widow’s passing might create financial uncertainty for the family member. Second, when the widow’s estate is large enough that federal estate taxes may shrink her estate resulting in the beneficiaries inheriting a significantly smaller estate.
In the first situation, the widow might be working and earning wages that are used for the benefit of the family member. Or perhaps the widow is receiving a pension or annuity payment that will stop once she passes away. In either case, the death of the widow results in lost earnings or a pension or annuity that stops making payments. Life insurance may make sense to provide for the financially dependent family member.
The second situation, wanting to pass along a net worth equal to or nearly equal to the net worth prior to death, or even generating a larger net worth to pass along to the beneficiaries, may require a life insurance policy on the second spouse to die. This type of insurance policy is normally a whole life or universal life policy and is typically kept in an Irrevocable Life Insurance Trust (ILIT). The ILIT is outside of the widow’s estate, so it does not face the same threat of estate taxes that a policy might face if registered in the name of one or the other spouse.
Long-term Care Planning for Widows and Widowers.
A common discussion point among financial advisors is that Long-Term Care Insurance (LTCi) may not always be needed by a widow, but a Long-Term Care Plan (LTC Plan) certainly is.
As we will see later, not everyone needs or can afford LTCi. But everyone does need a LTC Plan, especially a surviving spouse. With couples, there is somewhat of an implied backup plan for LTC support. Ask most husbands and they will tell you that their wife will take care of them when the time comes. Ask a wife if her husband will take care of her when LTC is needed, and she’ll just say, “Oh, I’ll be alright”. With husbands typically meeting their demise first, a widow really needs to think through her own LTC plan. Even if the husband would have taken care of her, her husband is, unfortunately, no longer here to do so.
A LTC plan involves thinking through where and how you will age throughout the rest of your life and who will take care of you when you can’t take care of yourself. When asked, most people will tell you they want to stay in their home as long as possible, even to the very end. This is known as Aging in Place. It requires planning to do so, because many homes are not set up to deal with wheelchairs, walkers, and an occupant that can’t climb stairs, step into a high-walled tub, or reach high kitchen cabinets.
If family is not around, who will you hire to come into your home to cook, clean, shop, drive you to the doctor, dress, bath and feed you? There are people who provide these services. What do you do if your memory starts to fade or your cognitive abilities start to slip. Are you protected from yourself by avoiding incidents where you are found wondering outside and away from your home in the middle of the night, not knowing how to get home?
At some point, you may decide, or someone else may decide, that you need higher levels of care that are not available in your home. Skilled nursing care, memory care and situations requiring sophisticated and expensive medical equipment might only be available out of the home in a professional facility.
Having a plan is really important and these issues need to be considered by everyone.
Does every widow need LTC Insurance? It may be appropriate for some surviving spouses, but probably not all. For the widow with lower net worth, say $500,000 or less, LTCi may not be affordable. Traditional LTCi, which is pure LTCi that is not combined with other products, is expensive and premiums have been known to increase substantially, even double in recent history. A traditional LTCi policy premium may range from a couple thousand dollars to well above $5,000 per year for one individual. Paying that premium year after year and there being a chance of not using the policy benefits, makes one wonder if the high cost is worth it. In some cases, it probably is.
For those individuals who have a net worth of several millions of dollars, they might be in a position to self-pay their own long-term care expenses. For everyone else, with a net worth between $500,000 and several million, they may be a good candidate for a traditional LTCi or hybrid policy.
Hybrid policies are becoming more common and combine life insurance or an annuity with LTC benefits. Hybrids are popular because many feel they or their family will definitely benefit from the premiums paid.
The first type of hybrid is a life insurance policy combined with LTC benefits. This is normally a whole-life policy typically purchased with a lump sum payment. This life insurance/LTC hybrid will either provide your beneficiaries with life insurance proceeds upon your demise or provide you with needed LTC benefits. The second type of hybrid is an annuity combined with LTC benefits. This hybrid either provides you with a lifetime of income starting at a certain age or it provides you with LTC benefits if needed. Either way, a hybrid policy owner feels like they are receiving something for the payments they make.
Many widows are at a disadvantage compared to widowers in the same situation.
The wife often sacrifices her own earning potential and career progression to raise a family. Extended time out of the workforce reduces her own retirement benefits. And she is frequently the de facto caretaker for ailing parents and children in need, often at the same time.
As a widow, she may still have some of these responsibilities, but now she also needs to make ends meet with the resources inherited from her husband. She needs to determine the best use of each and every resource such as Social Security and retirement accounts and the interplay between them.
While this brief dive into retirement planning for widows is not comprehensive, hopefully it highlights some of the detailed planning, analysis and decisions needing to be made. The goal is to maximize the widow’s wealth to achieve and then maintain lifelong financial security.
If you are going through a life transition as a new widow and want a professional fiduciary advisor to partner with you, please reach out to me. If you are widowed and past the transition phase but feel that your current advisor isn’t providing the level of planning, wealth management and advice you need, please contact me so we can chat.