This is an interesting column to write as a financial advisor who lost a parent much too soon. My dad was 56 when he died.
Paul was a prolific saver. The guy practically squeaked when he walked, with one exception. He was always down to buy a beer for a friend.
Almost every column that we have penned thus far has been about how a thoughtful distribution plan can potentially provide more control over taxes in retirement. That is not an accident. My own family is navigating these exact issues today.
The “Widow’s Penalty” applies to any couple at the passing of the first spouse. Speaking from personal and professional experience - the earlier that loss occurs, the harsher the penalty.
Some examples of the Widow’s Penalty:
- Loss of income – work income, pension income, or one social security benefit (most spouses retain the larger benefit)
- Smaller tax brackets – moving from joint-filer tax status to single-filer tax status can create a profound, previously nonexistent tax drag
- Estate planning issues – unnecessary estate tax exposure can arise quickly (especially in Minnesota) if no estate planning was done before the first passing
- Required minimum distributions – we have written at length about RMDs potentially causing tax problems in the future. Surviving spouses still need to satisfy all required distributions, usually based on their own life expectancy. Uncle Sam’s pound of flesh gets heavier due to item #2 above.
The federal tax rates that we have today are scratching all-time lows. They will probably be different in the future.
If future tax exposure or your own longevity are a concern, there will never be a better time to get a plan in place.
Your family and your future self will thank you for it.
Josh Rebholz, CFP®, Vice President - Financial Advisor
Patrick Tinucci, Senior Vice President - Financial Advisor
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