Last updated: 02/28/2024

Losing a spouse is difficult enough without having to worry about your finances. Will your spouse be able to maintain their current lifestyle? Or will they have to sell assets and dip into retirement accounts to get by? Does your retirement plan protect your spouse against the survivor trap? If your retirement plan doesn’t have a plan for transitioning to widowhood, it likely won’t. It’s never a fun topic but talking about it now and creating a plan together can ease some of the distress that comes with losing a partner.

What Is the Survivor Trap?

This survivor trap, also known as the widow’s penalty, can have far-reaching effects on a surviving spouse’s lifestyle and financial freedom. There are several aspects to the survivor trap that can have a significant financial impact on the surviving spouse that often results in losing Social Security income and paying more in taxes.

1. When both spouses are alive, they each receive a Social Security check (assuming they qualify for Social Security). Let’s say Tim collects $3200 and Rhonda collects $2100. Then, Tim passes away before Rhonda, and she is entitled to keep one—the larger—Social Security payment. She keeps Tim’s $3200 portion but immediately loses her $2100 portion, thus lowering the income she receives each month by $2100.
2. For couples filing their tax returns jointly, they remain in the 12% tax bracket until their combined salary exceeds $89,450 (for 2024). However, if one spouse passes and the other files their individual return, they only need to have a salary of $44,725 before moving out of the 12% tax bracket. This is the biggest jump between tax brackets, but this applies across all tax brackets for those filing jointly vs. separately. (See more about tax brackets here.) The surviving spouse is allowed to file jointly for the year their spouse dies; they can also use the special surviving spouse status if there is a dependent child in the household—these are the only two exceptions. Moral of the story: When the surviving spouse becomes a single filer on their tax return, they often have to pay more in taxes.
3. Medicare beneficiaries with higher incomes can be subject to the Medicare premium surtax known as the income-related monthly adjustment amount (IRMAA)—a surtax that can double for a single filer.
4. Retirees with higher incomes could also pay higher taxes on their Social Security and may be required to pay a surtax on their net investment income because the tax thresholds are lower for single filers.
5. There could be a loss of pension benefits also—if the deceased spouse had one and depending on how it was set up and paid out.

What Can You Do to Prepare for Retirement to Avoid the Survivor Trap?

Reduced income through both losing Social Security benefits and paying higher taxes will likely cause the surviving spouse to have to find ways to replace that income—quite possibly taking more out of retirement accounts or other savings vehicles to pay for the increase in taxes, too. There’s a lot you can do proactively to not become financially vulnerable. Here are some recommended steps to plan for these contingencies (according to Kiplinger):

1. Understand how Social Security benefits work for spouses vs. widow(er)s – maximize your benefits by effectively using claiming strategies.
2. If a pension is part of your retirement income plan, maximize the withdrawal strategy in the case of widowhood to ensure your spouse can still benefit.
3. Evaluate if converting money from tax-deferred retirement accounts to a Roth IRA is right for you. Pulling money in retirement from tax-deferred investments can increase the surviving spouse’s tax bill; to account for this, you could do partial conversions over several years to minimize tax implications. Paying the taxes now at the lower joint filing bracket can save money on taxes in the future. Roth IRAs don’t incur taxes on withdrawals and aren’t required to take required minimum distributions at age 73 and beyond.
4. Update beneficiaries on all insurance policies and bank/retirement/investment accounts.
5. Have a designated place for important documents—and ensure your spouse knows where it is and how to access it. Check it frequently to ensure all necessary documents are there and up to date; this might include account numbers and passwords.
6. Pay off debt that could strain the surviving spouse financially.
7. Purchase or upgrade your life insurance policy, if applicable. The surviving spouse can use this money (likely tax-free) to help replace income after their spouse’s death.
8. Make a plan together. Don’t leave one spouse out of financial planning. This can cause a whole host of issues upon one spouse’s death, as they scramble to find important documents, access accounts, and understand their complete financial situation.

Simply educating yourself about the survivor’s trap (by reading this article!) is a great first step, as many are caught off guard when faced with this situation. Taking the next step by working with a financial team—which may include a financial or investment advisor, tax professional, and estate planning attorney—to help you develop a comprehensive strategy to protect your spouse from falling into this trap. They can help you evaluate your Social Security claiming options, investment management, taxes in retirement, and general estate planning to help your spouse protect their retirement dreams and your shared assets.

If you want to learn about more personalized and advanced strategies, schedule a 15-minute call with our team.

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References

Carlson, Bob. (2020, December 21). The Onerous Widow(er)’s Penalty Tax and How to Avoid It. Forbes. https://www.forbes.com/sites/bobcarlson/2020/12/21/the-onerous-widowers-penalty-tax-and-how-to-avoid-it/?sh=2cc81ac86667

Chang, Ellen, & Washington, Kemberley. (2021, May 14). What Is My Tax Bracket? 2020–2021 Federal Tax Brackets. Forbes Advisor.https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/ https://www.forbes.com/advisor/taxes/taxes-federal-income-tax-bracket/

CKS Summit Group. (February 5). Does Your Retirement Plan Protect Against the ‘Survivor Trap’? https://www.summitgp.com/does-your-retirement-plan-protect-against-the-survivor-trap/

Ghia, Derek. (2020, December 21). Does Your Retirement Plan Guard Against the ‘Survivor Trap’? Kiplinger. https://www.kiplinger.com/retirement/retirement-planning/601958/does-your-retirement-plan-guard-against-the-survivor-trap