As you may know, for decades, I have been helping widows navigate the financial complexities the recent loss of a spouse can bring.
I think this “specialty” began when dad died at 53 leaving my 47-year-old mom to clean things up and figure out what needed to be done.
I was nineteen at the time and wasn’t practicing financial planning then so had little to offer.
Needless to say, much of the messes could have been avoided if my folks had sat down with a Certified Financial Planner® practitioner.
I feel the biggest issue to face when one loses a spouse is not the finances per se but rather the emotional impact the loss has on being able to deal with the finances.
First and foremost, we here at Financial Planning Solutions, LLC are a financial planning firm. Sure, investments play a huge role in one’s financial health but if we don’t have a comprehensive plan overall, the “best” investments in the world won’t fix things.
Much like a beautiful house sitting on a crumbling foundation won’t keep the house up for long, neither will a weak financial plan.
That is why I’m passionate about having a plan in place and the best time to craft such a plan is when we are in a good place emotionally.
If you are a married couple (and if you are an unmarried couple, it can be even more complex) having such a plan in place is key.
Here are a few things to keep in mind.
When a married couple own a home together, have lived in it for at least two of the last five years, they can sell the home and exclude from taxes up to 500k in gains.
There is a rule around the sale of a home if a spouse passes away. Basically, the surviving spouse has up to two years after the spouse has died to sell and be eligible for the 500k exclusion on taxes. The surviving spouse must not have remarried to qualify.
Rick’s Tip. I am a firm believer on not making any major decisions when a spouse dies for at least a year. That being said, if enough time has passed (and it is before the two-year deadline) and selling your home with a large gain (over the $250,000 exclusion for single folks) makes sense, timing the sale before the two years are up can make sense tax wise.
If you are a young widow under age 59 ½ like my mom was and have a spouse that had a retirement plan such as an IRA, be careful about rolling the deceased IRA into your own. As a spouse, you have the unique ability to combine your deceased spouse’s account into your own.
Normally, this can make sense as it consolidates things and allows taking Required Minimum Distributions easier when required (Currently age 72 if you are not already taking distributions)
However, if one is under age 59 ½, and they are taking distributions from their own IRA, they could be subject to the IRS 10% penalty rule. By leaving the account in the deceased name, the 10% penalty is waived if you need to access this money early.
Rick’s Tip. Before taking or moving an account of the deceased, seek guidance from a Certified Financial Planner® practitioner who has experience in this area. Mistakes are common and usually cannot be undone.
The Widow’s Penalty
Generally speaking, married couples are best served tax wise to file jointly. (There are exceptions such as if one spouse has huge medical bills or student loan debt under certain repayment plans)
The Widow’s Penalty is when the surviving spouse’s tax rate is the same or even goes up once widowed. This usually happens in the year following death. The surviving spouse’s income can go down if the deceased was working or was collecting Social Security or a Pension and yet their taxes could increase.
Rick’s Tip. If a widow has dependent children, the IRS allows you to file as a surviving widow for up to two years after your spouse passes away. This has the same benefit as filing jointly which can be much more tax friendly. During this period, increasing income might make sense. Roth conversions are one idea that comes to mind. Make sure your tax preparer is aware that your spouse passed away. A knowledgeable CPA can be a critical member of the team.
Feel free to reach out to me if you have any questions. I’m here to help.
Here’s another piece you may find of interest “The Top 7 Mistakes Widows Make” Click HERE
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.