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The Widow’s Penalty: Why Taxes Rise After a Spouse Dies and How Roth Conversions Can Help · Align Your Retirement

• 0:00
  SPEAKER_00: Why does a widow usually pay more in taxes than she did when her husband was alive on the exact same income?
• 0:06
  SPEAKER_00: Most people have no idea this even happens until it does.
• 0:09
  SPEAKER_00: It has a name, it's called the widow's penalty, and for most married women, it's not a question of if it hits, it's when.
• 0:17
  SPEAKER_00: Welcome to Align Your Retirement, the show for women who are serious about the years around retirement.
• 0:23
  SPEAKER_00: I'm Hazel Secko, a certified financial planner and a fee only fiduciary.
• 0:28
  SPEAKER_00: Retirement is too important to wing, so every episode I walk you through the real decisions that move your retirement date in plain language.
• 0:35
  SPEAKER_00: Let's get into it.
• 0:36
  SPEAKER_00: Here's the part that catches people off guard.
• 0:39
  SPEAKER_00: When one spouse passes away, the survivor doesn't just lose a person.
• 0:44
  SPEAKER_00: The next year, she usually files as a single taxpayer on close to the same income in tax brackets that are far less forgiving.
• 0:52
  SPEAKER_00: Same money, higher tax, often for the next decade.
• 0:56
  SPEAKER_00: The good news is that this is one of the most solvable problems there is for retirement.
• 1:02
  SPEAKER_00: And one of the cleanest tools to soften it is the Roth conversion, done in the right years for the right reasons.
• 1:09
  SPEAKER_00: Let's make this concrete.
• 1:11
  SPEAKER_00: While you're both alive and filing jointly, you get the married brackets and the married standard deduction.
• 1:18
  SPEAKER_00: Roughly speaking, you can have about twice the income before you hit a given tax rate compared to a single filer.
• 1:25
  SPEAKER_00: Now, one spouse passes away, for the year of death, you can usually still file jointly, but the year after that, the surviving spouse files as a single.
• 1:35
  SPEAKER_00: And here's what surprises people.
• 1:37
  SPEAKER_00: Her income often barely drops.
• 1:40
  SPEAKER_00: The pensions, the required minimum distribution from retirement accounts, the larger social security benefit of the two, a lot of that keeps coming.
• 1:48
  SPEAKER_00: So you have nearly the same income, not squeezed into single brackets that are about half as wide with a smaller standard deduction.
• 1:57
  SPEAKER_00: The result is a higher tax bill on the same lifestyle every single year going forward.
• 2:03
  SPEAKER_00: And because women, on average, outlive their husbands, the person living through this penalty is usually the wife, often for decades.
• 2:12
  SPEAKER_00: There is a second layer most people never see coming.
• 2:15
  SPEAKER_00: Those single brackets can also push her over the income lines that raise her Medicare premiums.
• 2:21
  SPEAKER_00: So the penalty isn't only income tax, it can quietly raise her health care costs too.
• 2:27
  SPEAKER_00: This is why I care about it so much for the women I work with.
• 2:30
  SPEAKER_00: You can do everything right as a couple and still hand a survivor a tax problem you never meant to create.
• 2:38
  SPEAKER_00: So let me walk you through a real example with real numbers so you can see how this plays out.
• 2:44
  SPEAKER_00: I'll use a sample couple, I'll call them Diane and Paul.
• 2:48
  SPEAKER_00: They're not actual clients, this is a hypothetical, but their situation is one I see all the time.
• 2:54
  SPEAKER_00: Diane is 59, Paul is 62.
• 2:58
  SPEAKER_00: Together, they've saved about$2.1 million.
• 3:01
  SPEAKER_00: And here's the important part.
• 3:03
  SPEAKER_00: Most of that, roughly$1.45 million, is sitting in traditional retirement accounts.
• 3:09
  SPEAKER_00: Therefore, one case, their IRAs, that's money that has never been taxed yet.
• 3:14
  SPEAKER_00: Every dollar that comes out in retirement gets taxed as ordinary income.
• 3:19
  SPEAKER_00: Right now, while they're both alive and filing jointly, their income sits in a comfortable, moderate tax bracket.
• 3:27
  SPEAKER_00: Everything looks fine.
• 3:28
  SPEAKER_00: And that's exactly the trap.
• 3:30
  SPEAKER_00: It looks fine while they're both here.
• 3:33
  SPEAKER_00: Now, let's say Paul passes away in his late 70s and Diane lives into her 90s.
• 3:39
  SPEAKER_00: Statistically, that's the more likely path.
• 3:42
  SPEAKER_00: Watch what happens to her taxes.
• 3:44
  SPEAKER_00: Her income barely changes.
• 3:46
  SPEAKER_00: She still has the required minimum distribution from those big traditional accounts.
• 3:51
  SPEAKER_00: She still has Social Security.
• 3:53
  SPEAKER_00: She still has the same basic lifestyle, but now she's filing as a single person.
• 3:58
  SPEAKER_00: That same income that fit comfortably in the married brackets is now stacked into the single brackets, which are about half as wide.
• 4:07
  SPEAKER_00: So a meaningful chunk of her income gets pushed up into a higher rate.
• 4:11
  SPEAKER_00: That increase year after year for the rest of her life is the widow's penalty.
• 4:17
  SPEAKER_00: And when you add it all up over her remaining years on a household like this one, it can easily come to six figures in extra taxes.
• 4:25
  SPEAKER_00: Money nobody planned for and nobody chose.
• 4:28
  SPEAKER_00: So here's the lever we have.
• 4:30
  SPEAKER_00: While Diane and Paul are both alive, they have those wider married brackets to work with.
• 4:36
  SPEAKER_00: We can take some of that traditional money and convert it to a Roth on purpose.
• 4:41
  SPEAKER_00: A portion each year, filing up to the top of a target bracket and no further.
• 4:47
  SPEAKER_00: They pay some tax on it now at the married rate on their own terms.
• 4:52
  SPEAKER_00: And here's what that does.
• 4:54
  SPEAKER_00: By the time Diane is on her own, a meaningful share of their savings is now in the Roth.
• 5:00
  SPEAKER_00: That money is never taxed again.
• 5:02
  SPEAKER_00: It also doesn't force those big required minimum distribution.
• 5:06
  SPEAKER_00: So when she's filing as a single person, her taxable income is lower.
• 5:11
  SPEAKER_00: Less of it gets caught in those tighter brackets.
• 5:14
  SPEAKER_00: And the penalty shrinks.
• 5:16
  SPEAKER_00: It can help on the healthcare side too, because lower taxable income can keep her under the lines that spike her Medicare premiums.
• 5:24
  SPEAKER_00: Now, I want to be honest about the trade-off because this is where the real planning lives.
• 5:29
  SPEAKER_00: Converting means paying more tax today, and that's money that leaves the portfolio now.
• 5:36
  SPEAKER_00: It is genuinely hard to pay a tax bill sooner than you have to.
• 5:40
  SPEAKER_00: So we don't do this to win some bracket game.
• 5:43
  SPEAKER_00: We do it to protect the person who is going to be filing single on nearly the same income for a decade.
• 5:50
  SPEAKER_00: For Diane and Paul, that trade is worth it.
• 5:53
  SPEAKER_00: For another couple, it might not be.
• 5:55
  SPEAKER_00: The only way to know is to run the numbers on your actual situation.
• 6:00
  SPEAKER_00: So if you're watching this and you recognize your own household in Diane and Paul, here's where I'd start.
• 6:07
  SPEAKER_00: Before you touch a single conversion, you want to know where you actually stand on your numbers.
• 6:13
  SPEAKER_00: I built a free retirement readiness assessment for exactly that.
• 6:17
  SPEAKER_00: It takes about five minutes, it gives you a personalized score and a real estimate of where you are, and it doesn't require an account.
• 6:24
  SPEAKER_00: The link is down below in the description.
• 6:27
  SPEAKER_00: And if you're farther along and you want someone to actually run the conversion math for your situation, including what it means for the surviving spouse, I offer a free 15-minute line call.
• 6:39
  SPEAKER_00: That link is right there too.
• 6:41
  SPEAKER_00: No pressure, no products.
• 6:43
  SPEAKER_00: I am a family advisor.
• 6:45
  SPEAKER_00: Now you might be thinking, okay, but how do I know if a conversion is actually worth it for me?
• 6:50
  SPEAKER_00: And not just for Diane and Paul.
• 6:52
  SPEAKER_00: That's exactly the right question, and it's what I cover next in the episode on how to find your Roth conversion breakeven point and why breakeven isn't even the whole story.
• 7:03
  SPEAKER_00: If you're listening, that's the next episode.
• 7:05
  SPEAKER_00: Just hit play on it.
• 7:07
  SPEAKER_00: If you're watching, I'll put it right here.
• 7:10
  SPEAKER_00: That's it for today.
• 7:11
  SPEAKER_00: If this was helpful, follow align your retirement wherever you listen or subscribe on YouTube.
• 7:16
  SPEAKER_00: So the next one finds you.
• 7:18
  SPEAKER_00: Hazel Secko, retirement is too important to wing.
• 7:21
  SPEAKER_00: I'll see you next time.