facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Retired Military Finances 401: The Widow(er)'s Penalty

Retirement Funding Estate Planning

There are a lot of variables to consider when deciding whether to make Roth conversions or not. I’ve addressed some of them in other blog posts (check the list below). But one thing many people miss is what Ed Slott calls the “Widow’s Penalty”. This has to do with the fact that after one spouse passes, the surviving spouse, in most cases, will be taxed as a Single and that likely means in a higher tax bracket.

How Do Taxes Work for a Surviving Spouse?

In the year of death, the surviving spouse will file as Married Filing Jointly, if desired. In most cases the following year the surviving spouse will file as single. There is one exception. The surviving spouse can file as a surviving spouse (essentially Married Filing Jointly) if the two following conditions are met:

  1. The spouse passed away during either of the two tax years immediately preceding the tax year
  2. The surviving spouse maintains a household which is the principal place of abode for a dependent child

If that exception doesn’t apply, the surviving spouse will pay taxes at the single rate

How Bad is It?

Well, as my weapons school grad friends like to say, it depends. But if you have a large amount of money in pre-tax accounts, it something you need to be concerned about. Let’s look at an example. We’ll make the following assumptions (all numbers are in 2020 dollars):

  • Both spouses are age 80
  • Military Pension is $75,000 per year
    • SBP has been selected
  • Combined Social Security is $45,000 ($30,000/$15,000)
  • Pre-Tax funds equal $600,000
    • Funds grow at 5%
    • Required Minimum Distribution is taken on 1 Jan
    • Surviving Spouse rolls funds into an IRA in his or her name (not a beneficiary account)
  • Couple takes the standard deduction
  • Military retiree spouse passes away at age 80

 

 

Both Age 80 (Married Filing Jointly)

Survivor Age 81 (Filing Single)

Adjusted Gross Income

$145,335

$102,931

Standard Deduction

$27,400

$13,700

Taxable Income

$117,935

$89,231

Tax Bracket

22%

24%

 

If the funds in pre-tax accounts are more, the effect would be greater. Other sources of income would aggravate the situation as the married couple is a long way away from the 24% bracket and the surviving spouse is just into the 24% bracket.

What Do I Do About It?

There are other things to consider, but after ending your second career it may make sense to look at Roth conversions to fill up your current tax bracket. Tax laws are likely to change before you’re in this situation, so you’ll need to check when the time comes.

Military Finances Are Different 

Your military pension and the Survivor Benefit Program affect this calculation. If you’re working with a financial advisor that doesn’t understand your military benefits, he or she may not even consider this. We think you should work with a financial planner that you don’t have to explain your military benefits to. If you want to chat, give us a call or schedule a no-cost initial consultation.



If you found this article post useful, you might like the following blog posts:

Military Finances 201: Roth Conversions. 4 Things to Consider


Watch Out for this Tax Tripwire


Military Tax Benefit:  Rollover of SGLI Proceeds to a Roth IRA







Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.