The passing of a spouse brings an emotional and financial burden. Perhaps the biggest challenge is the possible existence of a “survivor’s penalty,” which may weigh heavily on the surviving partner’s tax liability. This penalty comes into play when you change your filing status from married filing jointly to single. This change can make you pay more in taxes and pay more for your Medicare premiums. With some strategic Roth IRA conversions this impact can be significantly minimized.
The process of moving pre-tax or nondeductible IRA funds into a Roth IRA. Even though this creates an immediate taxable event, it can set in motion tax-free growth to accumulate inside the Roth account.
The Roth account offers a “double benefit.” You can take tax-free withdrawals, and you aren’t subject to required minimum distributions (RMDs) while you’re alive. For most, this combination makes them a compelling option when it comes to long-term planning.
In the year of a spouse’s death, considering Roth conversions becomes even more critical. The pre-tax individual retirement account (IRA) of the deceased spouse usually passes to the surviving spouse with required minimum distributions (RMDs).
In 2025, married couples will see a standard deduction of $30,000, fully half of their taxable income. For single filers, the deduction will increase to $15,000, creating an unusual 15% jump in tax brackets. The surviving spouse can file taxes jointly with their deceased partner for the year of death, assuming they don't remarry before year-end. The next year, they’re probably going to have to return to filing as single.
The second is that Social Security income can be very variable. If everything else is equal, the other spouse might be looking at a higher tax bracket as a single filer. This is where the “survivor’s penalty” comes into play.
You're aiming to pay taxes when your rate is the lowest. - CFP Jeff Levine, a certified public accountant and chief planning officer at Focus Partners Wealth in Clayton, Missouri.
One important strategy to help avoid the survivor’s penalty is to consider doing Roth IRA conversions. Early, robust planning, with multi-year expected tax projections, can do much to inform whether taking on those taxes earlier pays off down the line. By strategically converting pre-tax funds to a Roth IRA, the surviving spouse can reduce future RMDs and potentially lower their overall tax liability.
Roth IRA conversions can be part of the solution and a powerful strategy to help reduce the potential future tax burden with proactive planning. This involves multi-year tax projections and additional strategies to determine if it is worth the cost to incur taxes earlier.
