Those who are recently widowed deal with an overwhelming amount of emotional, social, and legal stressors. Another stressor not as commonly considered is the financial and tax impact, known as the “widow’s penalty.” The penalty encompasses more than a potential loss of income to include changes to items like tax brackets and Medicare premiums. Planning ahead can help mitigate some of the financial impacts. This blog covers ways to help alleviate the widow’s penalty.
Strategically Plan Social Security & Pension Benefits
Determining when to claim Social Security is unique to each situation. In some cases, such as when the higher-earning spouse is several years older than the lower-earning spouse, it can make sense to delay benefits until age 70. The advantage is twofold: higher spousal benefits during both lifetimes, and higher survivor benefits if the older and higher-earning spouse passes away first. In this case, the surviving spouse will inherit the higher benefit, which can help reduce some of the negative financial impacts of becoming a widow(er). Delaying is not always possible depending on one’s financial situation, but it is one factor to consider in an overall financial plan.
Some married couples also have to decide on survivor benefit options for a pension when they retire. While choosing an option with a survivor benefit will reduce pension payments during both lifetimes, it will ensure that the surviving spouse continues to receive pension income after the pension-holder passes away. Leaving funds behind for a spouse is also a consideration when choosing a monthly annuity option or a lump-sum option for a pension payout (if both are presented as choices).
These options can help the surviving spouse have a steady flow of income throughout the rest of their retirement. Unfortunately, that also means they’ll have more taxable income in a time where their tax brackets are no longer as favorable as filing jointly.
Use the Final Joint Tax Return Wisely
The year of a spouse’s passing is the final year to file as married filing jointly. This status comes with more favorable, lower tax rates. In subsequent years, the surviving spouse will file as single or head of household, depending on their situation.
During this final year with lower taxes, surviving spouses should consider accelerating income, such as through recognizing capital gains or converting assets to a Roth account. Roth conversions are when you move funds from a pre-tax retirement account, like an IRA or a 401(k), into a Roth IRA. You pay taxes on the converted funds, but then they continue to grow tax-free forever inside the Roth IRA. Converting funds when completing taxes as married filing jointly allows spouses to take advantage of more generous tax brackets. Let’s take a look at an example:
Beth and Ronald have been married for 40 years. Unfortunately, Ronald passed away in mid-2024 at age 70. This was Beth’s final year to file as married. Their taxable income in 2024 was $80K. In 2025, Beth’s taxable income will be $65K due to the loss of Ronald’s Social Security benefits.
Beth’s taxable income will be $15K lower in 2025 than it was in 2024. However, taking a look at the tax brackets shows that her income will land her in the 22% bracket in 2025, when they were in the 12% bracket in 2024. Beth could have converted up to $29,300 in 2024 and paid only 12% tax on the funds.
Adjust Retirement Account Beneficiaries
What happens if a widow(er) inherited more money than they need to live on, and it is going to cause a significant increase in their taxable income? They may consider splitting or disclaiming IRA accounts they would have otherwise inherited from their deceased spouse. This could allow them to direct funds straight to their children, who may be in lower tax brackets.
If the surviving spouse does not take possession of the IRA by opening an inherited IRA or rolling it into their own IRA, they’ll be able to reduce future required minimum distributions, thus reducing their taxable income.
Plan for Medicare IRMAA Surcharges
Medicare premiums are subject to an income-related monthly adjustment amount (IRMAA) based on a taxpayer’s modified adjusted gross income, which can add up to almost $530/month to Medicare premiums when covered by Part B and Part D. Taking advantage of strategies to reduce income can help control not only your tax bracket but IRMAA as well. We’ve already discussed disclaiming accounts and converting pre-tax retirement accounts to Roths as ways to help control the potential spike in income that comes at the RMD age, but this may not be as impactful if you have large survivor benefits on pensions.
If you are charitably inclined, you can consider charitable giving to help reduce taxable income. A great way to do this for those over age 70.5 with significant pre-tax assets is through qualified charitable distributions (QCDs). With a QCD, you can direct money from an IRA account straight to a charity. You then never pay tax on the funds that come out of the IRA, and your favorite charity gets a donation. A win-win! The 2025 limit on QCD gifting is $108K. Funds donated in this manner will also count toward a taxpayer’s required minimum distributions when they are RMD age.
Diversify Income Sources for Flexibility
A great way to control income taxation in any situation is by having account type diversity. Having a mixture of taxable, tax-deferred, and tax-free accounts (e.g., brokerage, 401(k), and Roth IRA accounts) allows you to strategize which accounts to pull from for spending needs while keeping your taxable income within the desired tax bracket. Here’s an example:
Ronald is a 75-year-old widow whose IRA withdrawals so far this year place him in the 22% bracket and in the first level of Medicare surcharges. He wants to surprise his family with a vacation and needs to withdraw $30,000. Taking these funds out of his IRA would push him into the next tax bracket and also, perhaps more importantly, push his income into the next level of Medicare surcharges. Luckily, Ronald has a substantial Roth IRA account that he built up by doing Roth conversions when he was in the 12% bracket right after his early retirement, so he withdraws the funds from here to control his tax liability and Medicare premiums.
Estate Planning & Asset Protection
Dealing with a death is never easy from an emotional perspective, but it is also made difficult administratively. Some people appreciate the distraction, but others rightfully want the space and time to grieve without having to think about probate and who is going to get what.
Structuring assets properly during life by instituting clear beneficiary designations, trusts, and transfer-on-death (TOD) designations where applicable can help make the administrative process smoother for the surviving spouse. While the fee to engage an attorney and set things up properly can be hard to swallow, it can save hours at one’s end of life, as well as attorney fees when managing probate.
Conclusion
Experiencing the widow’s penalty can feel like an added burden at the worst possible time. It’s completely normal to feel overwhelmed by the tax jargon and new rules on top of everything else you may be dealing with. The key message we want to give you is one of empowerment and hope: With some informed planning, you can soften the financial hit. By understanding how your filing status changes, knowing the critical window of opportunity, and using strategies like Roth conversions, careful withdrawal planning, and smart timing of decisions, you’ll be better positioned to keep more of your money and reduce stress in the years ahead.
Always remember to take care of yourself first. Finances are important, but so is your well-being. Tackle these tasks at a comfortable pace, and don’t hesitate to seek help from trusted professionals or knowledgeable friends and family. Many widows and widowers have walked this path, and there are resources (support groups, nonprofit organizations, financial education for seniors, etc.) that understand what you’re going through.
In loving memory of your spouse, one of the best things you can do is secure your financial future. Thoughtful tax planning is a part of that. By avoiding unnecessary tax bills, you preserve more of your nest egg for yourself, your children or grandchildren, and causes you care about. That’s a positive outcome you can strive for, even in the face of loss. With an empathetic approach and the strategies discussed, you can approach the coming years with greater confidence and peace of mind. You are not alone, and with the right planning, you can move forward financially secure while honoring the past you shared with your loved one.
Discuss your situation with a fee-only financial advisor.
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