Money matters: Ahead of time

Newly widowed spouses face important financial decisions, some of which must be handled quickly and while the loss is still fresh. (iStock.com/KatarzynaBialasiewicz)

The death of a spouse is often a wrenching experience, with the surviving spouse in a fragile emotional state. Unfortunately, some important financial decisions loom for the spouse who finds themselves in these circumstances, requiring action before the end of the calendar year. 

“When one spouse dies, the surviving spouse’s tax liability goes way up, because [household income] is being taxed at a single-taxpayer rate,” said David Shucavage, founder and president of Carolina Retirement Planners in Wilmington. He explained that making changes during the remainder of that calendar year can reduce future taxable income and assets.

“If you are married, your taxable income up to $197,500 is taxed at 22%,” Shucavage said. “If you are single, the top of that 22% tax bracket is $95,375. The 24% tax bracket for married people extends to $364,200; for single people it’s $182,100 – essentially half.”

He notes that tax rates will change as of Jan. 1, 2026, when the tax cuts contained in the Tax Cuts and Jobs Act of 2017 expire. The current 22% tax rate will increase to 25%, and the 24% rate will rise to 28%. The 12% rate increases to 15%.

“That’s the law. Congress can do nothing about it,” he added.

One strategy Carolina Retirement Planners recommends to its surviving-spouse clients is to convert as much of their assets to a Roth IRA as possible within the calendar year, when the money they put into a Roth will still be taxed at the “married” rate. 

A quick refresher: When you make a Roth IRA contribution, you pay the taxes on that money upfront and the money in the account grows tax-free. You can usually make tax- and penalty-free withdrawals after the age of 59-and-a-half. By comparison, a traditional IRA usually consists of pre-tax dollars and the money is tax-deferred as it grows. Withdrawals are taxed at your current tax rate after you turn 59-and-a-half.

“In the year your spouse dies, you have one last chance for Roth conversions,” Shucavage said. “Working with our clients in this situation, we maximize how much we can convert.”

The other side of the coin, Shucavage points out, is maximizing income and assets for the surviving spouse. Unpleasant though it may be to talk about death when both spouses are perking right along, Shucavage advises his clients to take the long, surviving-spouse view when making decisions about Social Security benefits, pensions and other financial assets. It’s still true that men tend to be the main breadwinners, and they tend to have a shorter life expectancy.

“It’s a statistic that 80% of men die married, but that 80% of women die single,” he said. “You need to think about [surviving spouse benefits] earlier.”

A first step, while both spouses are still healthy, is looking at whose name is on their credit cards, investment accounts and utility bills. 

“You probably want to consult with an attorney,” Shucavage advised. “Usually there is not a probate involved when one spouse dies, but if assets are in the deceased spouse’s name only, those could be probatable assets. For instance, if the deceased spouse had a credit card in their name only, the surviving spouse can’t use it. If one person’s name is on the electric bill and he dies, the utility won’t talk to you.”

Besides converting money in a traditional IRA to a Roth and taking the tax hit before a spouse dies or before tax rates go up at the beginning of 2026, couples need to think about those survivor benefits.

“If I have been earning a pension, how should I take it when I retire?” Shucavage said a person should ask. There are three choices: 

• The retiree draws the highest pension amount before he or she dies, but there is no survivor benefit;
• The retiree draws less, but the spouse is entitled to 50% of the pension payment after the spouse dies;
• The retiree draws even less, but after death the spouse receives almost as much as the retiree’s monthly pension.

“Don’t be cavalier about it,” Shucavage advised. “Unless you have beaucoup bucks, take the 100% survivor benefit option, and talk to an adviser who can look at your income plan.”

Another major decision couples should make while they are still healthy is when to start drawing their Social Security benefit. The age range is as early as 62 and as late as 70.

“Each year you delay you will lock in about 8% more income for the rest of your life,” he said. “Think of your spouse as well as yourself, because the surviving spouse will receive the higher of [the couple’s] Social Security benefits.

Shucavage advises couples looking at retirement to let at least the higher wage-earner delay receiving Social Security benefits until age 70, if they can afford to do that. Even if that spouse has retired, the Social Security account is still growing.

“Spend your IRA income earlier, but wait to draw Social Security until age 70 if you can, because it will grow at 8% per year, plus any cost-of-living adjustments,” he explained.

Shucavage is a fan of the Roth IRA for more than just pre-paying income tax at a more attractive rate. He recommends setting up a Roth rather than a 219 plan to fund a grandchild’s college education. 

“Make the Roth payable to the child’s parent,” he advised. “That way, if the kid gets a scholarship and that money isn’t needed to pay for college, it can be spent in some other way.”