In this presentation, financial planner Craig Wear, CFP®, explains why surviving spouses often face higher tax liabilities than married couples filing jointly. He outlines three retirement tax phases: (1) married filing jointly with wide tax brackets, (2) widow/widower years where filing status shifts to single, halving bracket width and raising marginal rates, and (3) inheritance years when heirs inherit large IRAs subject to the 10‑year rule. Wear illustrates how required minimum distributions (RMDs) from sizable IRAs create a growing, uncontrollable taxable income stream that pushes surviving spouses into higher brackets, and how heirs can be hit with top‑rate taxes. He then recommends proactive strategies—particularly Roth conversions, charitable giving, and other planning tools—to mitigate the tax bomb, and promotes an RMD calculator that estimates lifetime tax impact for prospective clients.
Chapters
So, look, if something happens to you, let me ask you a question. What happens to your spouse's tax situation? Have you thought about that? Have you thought about it in detail? Do the taxes go down or do they go up? You know, most people we talk to, they say, well, the taxes go down because there's only one of us there. And in reality, for most retirees, especially IRA millionaires, the remaining spouse's taxes actually go up. See, what happens is the moment one spouse dies, whether it's you or your spouse, the tax system changes. It's written, it's black and white, but how you get to apply it changes. And if you have that large IRA, if you're that IRA millionaire, the problem on the tax thing gets a lot worse. So today I want to go through why surviving spouses often pay more tax than married couples, why large IRAs create a ticking tax time bomb that I want you to learn about. And I want to share with you how that 10-year inherited IRA rule actually magnifies this problem for heirs. So, and the last thing that we'll talk through is how a strategic Roth conversion plan can protect your spouse and your legacy. So, let's just break it down into some phases of a typical retirement tax system, if you will. There are 3 phases that we're all going to go through that every retiree faces if you're married. So if you're married and in retirement, you have that phase. If you then— when one of the spouses pass, now you're either a widow or a widower, and you have certain number of years that you're in that phase. And then the second remaining spouse passes, And now we have the inheritance years that your IRAs get to deal with. And so we're going to talk through each of those 3, and I hope I'll be able to kind of put the cookies on the bottom shelf, if you will, so that this becomes pretty easy to understand and you'll know what you can do about this by the time you sign off today. Okay, so let's get into Phase 1. You're married in retirement or married retirement. So you got two taxpayers, the income is split across two Social Security recipients. So there's two people. So now you have married filing joint tax brackets, which are wide. And when I say wide, what I mean is there's a lot of dollars between the low end of the bracket and the high end of the bracket. In fact, they're almost twice as wide as a single filer. So you're living those years and all of a sudden tax becomes manageable. You learn to deal with it. It's pretty much the same year after year. You try to figure out the ways to use the tax laws to your benefit the best you can, but it, it kind of feels predictable until you do something to change it. So when one of, one of either you or your spouse passes, now you move into the widow or widower's years and your IRA goes with you, right? So you got one taxpayer, your filing status drops immediately to single taxpayer. You got the same income for the most part. You may lose some Social Security benefit or part of a pension or however your life is structured, but the income doesn't shrink dramatically just because a spouse dies. I mean, the IRA stays around, the spouse inherits it most of the time, the brokerage account stays around, nothing significant changes, and you end up with the same income same assets, but smaller tax brackets. In fact, about half as wide. So you have the same income, but higher rates. And so let me get, show you kind of a dramatic example of what happens. Let's say between all your pensions and your dividends and your gains and your required distributions, let's say you're married filing joint on one day and it's $215,000. Well, in today's tax bracket, married filing joint, that puts you at the 24% tax bracket. But if, like that, tomorrow one of the spouses is gone, then now that you have the same income of, let's say, $215,000, but now that $215,000 is at the 32% bracket for the remaining spouse. Same income, higher taxes, and really it just starts the beginning of a process that happened. Now let's say RMDs start. Now RMDs that come in, they just make it worse. Those are the forced taxable distributions that you're going to have from those large IRAs. And it, and it creates an income stream that you have no control over unless you do something ahead of time through Roth conversion or donations, charity, that kind of thing. And what a lot of people don't realize is that those required distributions generally grow each year because the factor that's used to calculate the dollar amount changes in a way where the, the amount you are forced to pull out goes up every year. Now, in addition to that, if the balance goes up and the factor changes to where you pull more, now you can see now why your balances get higher and higher. And some of the stuff I've done, just kind of spitballing it, if you just get a 5 or 6% rate of return, Your distributions, if they're $100,000 today, in 5 years they're going to be $125,000. So, about every 5 years they go up about 25%, assuming normal market activities and that kind of thing. So, and those withdrawals happen whether you're married or widowed. When the RMDs start, they start, and your surviving spouse gets to navigate this all by themself unless you do something ahead of time to make it work. So then we go to Phase 3, which is both spouses are passed and you leave this to whoever you're going to leave it to. Let's say it's— and for most people it's to their adult children. Normally, if you know, if you lived and if you live a normal American life expectancy, you're going to leave this money to your kids probably during their highest earning years or when they've just retired and they have their own tax plan. Now all of a sudden, this gargantuan IRA gets thrown into their life and they're forced to withdraw this stuff. Now all of a sudden, what we see is that typical heir's tax rate now goes to the top, either 35% or 37% on all that money. So, one client recently just said, look, I don't, I don't want to create a tax nightmare on her, the the daughter's end, if at all possible. And we hear these kinds of statements over and over in the conversations that we have with people. Hey, if you've got a million or more in your IRAs, the IRS already has scheduled one of the biggest tax bills of your entire lifetime. It starts at 73 or 75 years old. The problem is most people just haven't seen the number yet. We have an RMD calculator that we've put together that'll give you an idea what the taxes are going to be over your lifetime, as well as maybe what's going to be left for your heirs if, uh, you leave it all to them. Um, we've taken it a step further and we've cross-referenced that to people just like you that have been clients of ours, over 3,000 of our clients, and we want to be able to give you an idea what's possible for you to save if you get Roth conversions done right. So click the link below, take you about 2 minutes, and it'll be pretty alarming. Take care.
