Planning challenges for surviving spouses, part 2
Last week we began a discussion about the financial challenges faced by a surviving spouse after the death of a husband or wife. The first tip was no big changes or decisions right away; the second was to plan early for the loss of income due to reduced Social Security benefits after the passing of a spouse. Unfortunately, the issues related to Federal benefits rules aren't confined to Social Security.
The next challenge can come in the form of increased costs related to Medicare premiums.
A feature of Medicare more and more Americans are discovering is that the premium amount charged to beneficiaries is impacted by household income. In an adjustment process termed IRMAA (Income Related Monthly Adjustment Amount), when certain household income thresholds are crossed the amount of Medicare Part B premiums charged against Social Security benefits are increased.
For married couples filing a joint return, the first income threshold in 2025 is $212,000 of household income derived from a calculation termed MAGI (Modified Adjusted Gross Income). In my experience this threshold is high enough that with a little planning this increased premium can often be avoided.
The bigger challenge comes when a spouse passes and the surviving spouse is no longer filing a joint tax return. When this occurs, the income threshold drops from $212,000 to $106,000 -- a level much easier to cross over.
Using some assumptions, consider a surviving spouse aged 79 with $30,000 in Social Security income, a pension of $30,000, a CD earning $4,000 in interest, $100,000 in stocks paying $3,000 in dividends and an IRA valued at $700,000 requiring a Required Minimum Distribution of $32,000. That household is knocking on the door of a Medicare premium increase. After already seeing household Social Security reduced by $1,500 a month, our widow may also experience a Medicare premium increase -- a double whammy, especially if she tries to distribute more from her IRA to make up for the lost income.
Once again, the potential solution for this challenge is awareness and planning. While the calculation of household income used for Medicare purposes (MAGI) includes 100% of Social Security payments and sources like tax-free bond interest, and is not reduced for itemized deductions such as charitable giving, one critical source of potential income which is not considered in the MAGI calculation is distributions from Roth IRA accounts.
Joining last week's column and this week's: a couple understanding the potential income and cost risks associated with a spouse passing away might want to consider converting some balances held in traditional taxable IRAs to a tax-free Roth IRA earlier in their retirement -- in effect putting the Roth IRA "aside" as a possible solution to this statistically likely future issue.
While the act of converting IRA balances to a Roth IRA is taxable in the year the conversion is completed, the current tax environment is, in my opinion, very favorable to retirees. The potential benefit of decades of tax-free growth and tax-free future income which does not impact Medicare premiums may provide a long-term solution that addresses multiple future planning challenges.
Finally, estate property rules between spouses are very straightforward in the state of Indiana. Most property transfers between a deceased and surviving spouse can be managed with properly titled accounts and property deeds. In addition, IRS rules regarding IRAs and Roth IRAs make the process of moving assets from a deceased spouse's IRA to a surviving spouse simple and tax efficient. Once assets are transferred to the surviving spouse, however, complications can apply when planning transfer to non-spouse heirs.
So while in my practice we tend to focus on income and cost planning for the surviving spouse first, when the surviving spouse is emotionally ready a discussion of estate planning often becomes relevant, and at this point we often collaborate with other professionals to help update planning documents and decision-making processes.
The loss of a spouse is perhaps the most impactful event many of us will endure. With some honest conversation, foresight and planning, families can prepare for this eventuality with confidence -- but like so many other areas in life, the sooner this type of planning is addressed, the more tools are available to help couples take care of each other when this heartbreaking but inevitable event eventually occurs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
