One spouse passes away, and suddenly the survivor is filing alone, pushed into tax brackets they never saw coming. David McKnight explains why a Roth conversion, done now through smart retirement planning, could spare your loved ones the painful surprise known as Widow's Penalty.
In this episode, David McKnight discusses something that could cause your taxes to rise dramatically even if Congress never raises taxes by a single percentage point!
That's the so-called Widow's Penalty, and it's a critical piece of retirement planning that too many people overlook.
The U.S. national debt consists of hundreds of trillions of dollars in unfunded obligations for programs like Social Security, Medicare, and Medicaid.
At some point, David points out, the Government is going to need huge infusions of cash to meet those obligations.
Most people don't realize that a surviving spouse often inherits a tax problem at the moment in life when they're least equipped to deal with it – David explains the repercussions of this common scenario and why a Roth conversion can help.
David stresses that one of the most important retirement planning windows in your entire lifetime occurs during the years when both spouses are still alive and filing jointly.
During those years, you have an opportunity to take advantage of wider tax brackets and proactively reposition money from tax-deferred accounts into tax-free accounts through a Roth conversion.
When people contemplate the prospect of future higher taxes or the widow's penalty, they often panic and reflexively convert all of their IRAs and 401(k)s to Roth over one or several years.
That's an approach to Roth conversion that causes you to pay much more taxes than was really required.
The key to avoiding that, as part of any sound retirement planning strategy, is to move money slowly enough that you don't rise into a tax bracket that gives you heartburn.
And, on the other hand, move money quickly enough that you get all the heavy lifting done before tax rates increase for good.
Mentioned in this episode:
David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
