The difference is that married couples often build up more assets together than single people do living separately. This is one advantage of being married. (Among many others.)
When one spouse dies the years of double accumulation fall into the single’s tax brackets. At the same time, the widow(er) loses the income from the deceased spouse’s Social Security. So it’s a double whammy - lower income, higher taxes. It can be a real shock. Which is why pre-planning can be helpful.
Wendy
Agreed - very much so!
Pete
Also keep in mind that most of the people that would inherit any leftover IRA dollars (kids, other family members) likely only get 10 years to withdraw the IRA - thus making the IRA taxed at an even higher rate.
In those cases where the benes of an IRA are going to be effectively penalized for that short 10 year window, I have been telling clients that they should consider even higher amounts of Roth conversions.
No one wants their kids to have to suffer a 200k RMD - making them lose many of not only any tax breaks they may get but may also make them lose other forms of financial assistance, like lower cost or free drugs.
Google Gemini strongly recommended that we do aggressive Roth conversions up to the 24% tax bracket limit. This will trigger high income tax as well as IRMAA penalties.
The high income tax is an up-front expense that reduces liquidity that might be needed for other reasons (such as health care).
The situation is similar to a decision of when to take Social Security payments. It all depends on life expectancy. The long-term benefit is large but will we be alive to enjoy it?
Given DH’s health issues he has a 67% probability of being alive in 5 years and a 20% probability of being alive in 10 years. (He just turned 73.) I’m a 10-year double breast cancer survivor but my cardiologist says I could live to age 85 or 90. (My new heart valve is designed for a slip-in replacement when it wears out.)
So I’m not sure what to do.
I love DH like a teenager. I’d rather die first but that’s probably not in the cards.
Wendy
“Suffer”? Even at a 50% tax rate, they will have 100k to soothe the problems of paying for drugs!
JimA
Yes. Suffer.
My wife is on a drug that would cost her ~$10,000 a month if not for great insurance. If she was on ACA, she would have to pay at least 20% out of pocket; or $24,000 a year.
When she was first diagnosed two decades ago, this class of drugs were not covered by insurance and we had to pay $8,000 out of pocket. Luckily, our income was low enough to get it from the pharma company for free - after paying out of pocket for two months. If that situation existed today, that extra 100k would cost us an extra 120k.
And, that doesn’t account for all the tax benefits one might lose (even the ability to make Roth contributions) at higher income.
I’m not an expert. But I think this is slightly incorrect. The survivor loses ONE of the payments. You are able to choose -last I knew- which one you want to keep. So, whomever was the higher earner and/or claimed SS later, and was getting the bigger check, that’s the one you opt for.
I know…a bit nit-picky. But it is an important detail whenever the time arrives.
We were doing ROTH conversions. But now that we are on ACA, we don’t want to lose the tax credit by having to realize those gains. That’s also why 1poorlady isn’t going to be taking SS at 62 as she originally planned**.
**The plan/scheme was something many advisers recommended. The lower-earner took SS at 62, allowing the higher-earner to wait until 72 to get the larger pay-out.
@1poorguy you are correct about the survivor choosing the higher Social Security payment. Even so, many widow(er)s find the loss of even the lower payment hard to manage.
As for the ACA…beware…we were blindsided when DH turned age 65 and went on Medicare. Suddenly, ALL our income was imputed to me alone by the IRS for purposes of calculating the ACA tax subsidy. (Instead of being split between DH and me which put us both into the ACA subsidy eligibility.) Suddenly, I owed $12,000 in taxes because our entire income meant I no longer qualified for the subsidy and had to pay it back in a lump sum as tax.
Just a heads-up.
Wendy
You saved me some research. 1poorlady asked me about this on Saturday. But I wasn’t on the computer much this weekend (several manual labor projects).
I may have to post on the tax board seeking possible solutions (if any). Maybe change filing status to “married file separately”?
Could divorce her, but I don’t want to give her the chance to get away. I’m lucky she married me in the first place. 
Ask about this on the Tax Board. There are disadvantages to filing “married filing separately” and you need an expert to help you figure out what to do.
Wendy
I already did. Even got an answer pretty quickly.
So 2029 is going to be a bit painful. Still not sure about 2028, given that for about half that year I’ll be on Medicare.
Find out in advance so you won’t be blindsided at the last minute like I was.
Wendy
As far as I am aware, there is a relatively easy way to take advantage of both estate tax exemptions. So it doesn’t “drop”, but rather you use the first $13.99M now (at the first death), and then use the second $13.99M later (at the second death).
I don’t think this is the ideal way to think about it. The reason I say this is because of the average periods of time. If two people are married of similar age, and then at age 80 the man dies, then on average, the woman dies at age 84, then she only collects RMDs for 4 years at the lower percentages (lower than a 10 year period, say 10% a year). And THEN, the next set of heirs have to take it all over 10 years. So at best, you’ve extended the 10 years to 14 years, but at the penalty of the remaining spouse, the wife on average, having higher RMDs for those 4 years, and all the associated other things that come with it (higher tax rates, higher taxes due, higher IRMAA, etc). So, if the surviving spouse doesn’t need the money anyway, then it may still be better to have someone else inherit that IRA when the first spouse dies. If the surviving spouse DOES need the money, then this whole conversation is moot (because the numbers are lower and the taxes are lower, and things like IRMAA may not even apply, or may only be minimal).
Of course, in cases in which the surviving spouse is much younger (and/or much healthier) then it also doesn’t apply because the younger surviving spouse will collect RMDs at the lower rate for many more years than just 4. For example an 80 year old man married to a 65 year old woman. If he dies at 80, she will still have about 20 years to go on average.
Like I said earlier, if the IRA is $2M, and one heir would have to withdraw on average $200k a year to deplete it in 10 years, then it is likely, very likely, worth spreading that $2M across more people, perhaps grandchildren instead of children.
You could maybe do a little of both? The 22% bracket ends at $206,700 and the 24% bracket ends at $394,600. IRMAA for 2027 (uing 2025 income) will probably start around $220,000. So you can choose some number around there to make the decision, and at least do SOME Roth conversion this year.
Of course, on the other hand, do you really care all that much if your heirs will have to pay a bit more tax for the 10 years after inheriting? Or perhaps leave the IRAs to charitable organizations and leave the rest (that enjoys a step up in basis, etc) to regular heirs. There are many ways to split the difference.
What really needs to be done for whichever case you choose is to map out your income over the years after one of you dies. That’s the critical thing to do. If the numbers look dire, then you have to take action, but if the numbers look easily livable then perhaps nothing, or little, needs to be done. Pick a few dates, assume spouse death, and then see how much income/tax will be in the years after that assumption for the remaining spouse (you, in this case).
Talking about avoiding blindsiding, my wife was lightly complaining about working part time for our health benefits. I reminded her that she is more that 5 years younger than me, and when I go on medicare in a couple of years, she will still need to have coverage for herself for an additional 5+ years.
@MarkR how is your grandchild situation going?
I’m superstitious so I won’t congratulate you until you reassure us that all is well.
Wendy
True. But if you can manage it properly, and assuming the ACA doesn’t disappear, you can use the exchanges. If you don’t take SS until age 70, you won’t have that income. And if you eliminate most of your dividend paying assets, that may drop your income to levels where she can get coverage for reasonable rates.
I only mention this because if she doesn’t want to work, there are ways to avoid it. Plus you can then do things together that a job wouldn’t allow (e.g. taking a trip for a month or two at a time). Take advantage while you can, because at some point you won’t be able to do the things you like anymore.
Ideally, you start before the death of the first spouse but let’s use your example.
The majority of people with this problem saved in their 401k at rates of 15% (or 12%). Some saved at 24(22%). Very few saved at a rate any higher.
For individuals (and couples) in this situation, it may make financial sense to realize a higher tax rate of the current 22% or even 24% (by converting much more than the RMD) if it saves your kids from having to pay 32% or more - not only because of course it is a higher rate but higher income comes with all sort of lost benefits based on income.
Yes, but that option is not always available. I have a client in this exact situation - single child with no grandchildren. She can of course give it to someone/something else but defeats the purpose for which she saved it - and not everyone wants their 18 year old grandchildren to be granted a financial windfall for which they may not be responsible.
My inlaws used to have this issue (but not to the same extreme). They never made more that 100k while working as teachers and if both were to pass today (and if not for years of roth conversions), my wife and I would inherit IRAs of nearly 500k. Thankfully, we will be retired in the next ten years but if we were not, we would be stuck paying a 32% tax rate on that amount - twice the tax rate at which my inlaws saved it - essentially penalizing the fact that it was saved tax deferred. My wife is their only child.
We would be OK with one child getting that money (at their current ages) but not the other. One of them is in college and invested 30k and turned it into 70k over the last two years without spending a penny. The other rarely has more than $30 in their checking account.
Hmmm. You probably know more about this than I do. But couldn’t you set up some sort of trust for the $30 kid that is controlled by the $70K kid? Maybe expiring when the $30 kid gets to age 35 or so? We have a trust set up, and only 1 child. She’s approaching 30, and is the sole inheritor once we both are gone. When she was younger, we had trusted friends as administrators (we wrote that condition to expire when she was 26, as I recall).
Generally no. When you do, the 10 year rule typically still applies. Usually, the only time a trust inherits IRA money is when there is a disabled recipient and you don’t want them to lose medicaid or other financial support based on income/assets.
There are a few more edge cases but it starts to get quite convoluted and complex. Also, trusts can be taxed at much higher rates than individual tax rates.
Born a few minutes ago, it’s a boy, all is well, but no other details yet.
Don’t get me started about the abomination that is ACA. Years ago, when I needed a catastrophic policy, I could set the deductible high, maybe 10k or 20k, and then get a major medical policy for a few hundred a month max. Now? No such thing. We used the exchange last year for a couple of months and it was $3900 a month or so (for a mediocre at best policy that also had a high deductible). And while that policy was in effect we made ZERO claims. I want those old simple policies to come back - basically I want a policy where I pay for all medical care on my own unless God forbid one of us comes down with a heart attack or cancer and the costs rise to a large number, then the insurance kicks in.
Unless there’s a good reason to take it, I won’t be taking Social Security until age 70.
This isn’t possible without incurring a very large amount of capital gains.
And I would have to avoid interest, dividends, and capital gains for 5+ years (maybe only 4 because of lookback), and that simply isn’t possible because we use interest, dividends, and capital gains to cover our expenses.
My wife is taking classes right now to attain a certificate in something that could allow her to work remotely. If it works out, it’ll be great.
I’m not sure if this is true. This discussion is mostly about medium level affluent people, and they weren’t in the 15% tax bracket. Take me, for example, the bulk of my 401k savings were from the higher brackets - some years at 32%/35%, and one year (with a lot of capital gains) even 37% or 39% as I recall.
This year we will remain in the 24% bracket because I am avoiding long-term capital gains and instead taking long-term capital losses that will [probably] offset all the short-term capital gains this year. That will leave me some headroom in the 24% bracket if I am so inclined to convert some traditional IRA to Roth IRA. I am still thinking about it, but it is important to note that my trad IRA+401k is relatively low compared to regular taxable savings and investments. I just looked at the AARP RMD calculator, and it says first that I don’t have any RMD until age 75 under current tax law, and that the initial RMD will be under $40k. That’s not so much that needs to be avoided, correct? All I would need to do is to realize fewer capital gains once that new income begins to flow into my account (similar to what I assume I would do when social security begins at age 70 or so).
Well, first off, we are giving our kids money NOW when they need it a lot more than later. For example, just a few weeks ago we gave the couple that just bought a house $76,000 (I gave kid $19k, I gave their spouse $19k, my wife gave kid $19k, and my wife gave their spouse $19k). And they are still young, so they are not in their peak earning years, and thus are still in a low tax bracket. Second, as I mentioned above, I don’t see the sense in giving my kids money during their peak earning years, they don’t need it, and it may cause additional taxes. Instead I would prefer to give the grandchildren the money while they are in their early career years and still in the lower tax brackets, and while they still need the money. Obviously this is all assuming I live long enough to see my grandchildren become young adults. If I am dead, well … it won’t matter much to me at that point LOL.
If it’s not available then it’s not available. But on average it tends to be available - sometimes only a few grandchildren, sometimes many more. Each family is different.
This is indeed sometimes a problem. I’ve seen people set up various trusts that only distribute the money in tranches as the young adult grows up. Some go even as far as forcing the kid to meet certain requirements before the money is distributed. For example, get admitted to college, get some money from the trust. Graduate from college, get some more money from the trust. Get married, etc. Buy a home, etc. I don’t think I will go that far, partially because eventually if they want to blow the money they will find some way to do so, and partially because I don’t want to “waste” money repeatedly on attorneys to set up all those trusts, maintain those trusts, administer those trusts, and redraw them every time tax law or other law changes.
Heh. We have 5 kids and they are all different. Including when it comes to money. The one that just got married early this year and just had their first child tonight saved like crazy and invested a little. They nearly had enough for the entire down payment on their own, but with all the closing costs it would have been tight (per the banker that arranged their mortgage at 5.75%). And they still need money to furnish the house, etc (though they’ve done quite well finding used furniture over the last few weeks). But we still gifted them the money because they will definitely need it. One of them will stop working for a while to care for the new baby, so that’ll be an immediate loss of income. And owning a house comes with all sorts of additional expenses beyond just the usual monthly mortgage payment.
But some of our other kids are not savers/investors, they like to spend their money as it comes in. And one of them that completed graduate school more than a year ago (and moved back home) still hasn’t found a full-time job. And our youngest moved most of their funds out of their brokerage account associated with mine (that I could see their progress) into a robinhood account and they are trading there where I can’t see anything (kids today with all those crazy brokerage apps!!!)
@MarkR mazel tov on your new grandson. Wishing him and your whole family (and you) a long, happy life!
Wendy