Common Financial Mistakes Made When a Spouse Passes
The passing of a spouse is a very stressful and emotionally trying time. Due to this, it is a bad idea to make major decisions soon after a spouse’s passing. Unfortunately, many people do not heed this warning. In this article, we will go over 5 common financial mistakes that are made when a spouse passes and how to avoid them.
Ignoring Tax Implications
Many do not realize the major tax implications that the passing of a spouse can have on them. One of the main problems is that your tax filing status changes when your spouse passes. This could leave you in a higher tax bracket and cause you to lose out on tax breaks, like having a second exemption. With such a substantial change, it is important to meet with a tax advisor well before tax season. This advanced planning can help you not be caught off-guard by a large tax bill. It also gives you the necessary time to take measures to avoid one altogether.
Not Planning for Lower Income
Most people plan for their retirement, factoring in both spouse’s income. But they fail to plan for retirement if one spouse passes and the other is left with a reduced income. The loss of a spouse can be especially hard hitting if you heavily rely on social security income. When your spouse passes you can claim their payment, if it was higher than yours. But you will still be reduced to one social security check a month instead of two.
You also need to factor in the effect of a passing spouse on annuities and pensions. Some payments completely stop after a spouse passes whereas others may reduce payments by half. Such high reductions in income require advanced planning to make sure you are properly prepared.
Unplanned Tax-Deferred Account Withdrawals
If you find yourself with much lower income, you may be tempted to look to tax-deferred accounts to help replace the funds. This can end up being very costly. Any money removed from tax-deferred accounts is subject to taxation. Additionally, if you are under age 59 ½ when withdrawing you will be subject to a 10% early withdrawal penalty on top of your regular taxes. Taking unplanning withdrawals from these accounts can really add up and leave you with an unmanageable tax bill at the end of the year.
Not Rolling Over Retirement Accounts
Many surviving spouses do not realize that they can transfer their spouse’s retirement accounts. This is a great strategy to help delay taxation. By rolling the account into your name you prevent the need to immediately start paying taxes on the account funds. If you are under 70 ½ you can even delay the distributions until you need to begin taking required minimum distributions.
Waiting to Get Advice
Realistically, your top priority after your spouse passes will not be to go meet with any financial professionals. But you should not put off such meetings. It is especially important during this time to refrain from making large financial decisions without first getting advice on the ramifications.
You also need to keep in mind that all aspects of your finances affect each other. So, you will need to have someone help you take into consideration taxes, estate planning, financial planning, and investment advice. Failing to do so could leave you dealing with costly mistakes.
You Can Avoid These Common Financial Mistakes
With the proper planning you can avoid these common financial mistakes. If you take the time to plan ahead, avoid making big decisions at vulnerable times, and follow these 5 tips, you will find yourself in a safe spot.
Questions? Want to schedule an appointment? Contact us by clicking here.