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Monday, March 9, 2020

Crunching Numbers

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Is leaving your spouse your IRA a good idea or bad idea?

I get on a warpath mission for this: Should I leave my spouse my IRA? Of course!

Your spouse absolutely deserves every bit of it. Man up, cowboy, this is your cowgirl. You’re taking care of her, and she deserves it, she’s the beneficiary. In Louisiana, we’re a community property state. She’s going to get what she is due.

Here’s the problem, and it’s a big problem. What bugs me is a lot of advisors can’t talk about it; their firms do not allow them to discuss it. What am I talking about? Taxes. They’re not allowed to talk about taxes, and it’s an unfortunate thing because I think in a retirement plan from a true retirement perspective, you have to talk about that, and you have to address those things. Let me preface this with we are not giving tax-specific advice. That is for your CPA to do. We are, however, looking at possible tax consequences that can have some potentially devastating outcomes and possible solutions.

Here’s the problem leaving a spouse an IRA: Remember, the funds have never been taxed at all. What happens when a spouse passes away? The year that the spouse passes away is the last year of tax filing of married filing jointly. The next year the spouse files as an individual taxpayer, and the brackets are drastically different (lower) for an individual, which means you potentially will be paying Uncle Sam even more.

Here’s why I’m hitting this home: What else happens when a spouse passes? What benefit becomes lost or reduced? Social Security.

What’s that spouse to do if that income is needed? Now she has to possibly start taking from retirement accounts to make up for lost Social Security income. Taking it from qualified (IRA type) accounts goes on top of every bit of income, meaning those are the last dollars to get taxed. That can put a spouse into potentially higher tax brackets as an individual than where they currently sit married filing jointly.

I gave a workshop back in May at the Hamilton Branch Library, off of Bert Kouns, and the first thing a lady asked me was, “Are you going to talk about taxes on retirement income? Because my spouse passed away, and I’m getting clobbered because of this. It’s like my Social Security is now taxed. I don’t have his anymore, and now I’ve got to pay the taxes on our qualified retirement funds at a much higher rate.”

This is a beautiful plan for our government; it is. And they understand that – we got duped into it; it’s unbelievable. And are there ways around it? Yes. But, to put this in perspective, ladies, there’s an 80% chance you are going to be in control of the money.

Guys, let’s face it, we kick the bucket first. I mean it’s statistics, we go first. Eighty percent of men die married; 80% of women die single. (1) Women typically have a three-to-fiveyear lifespan after we do. This becomes a very, very big deal. Guys, we have to look out for our spouse. “This is the love of my life. This is who I’m looking out for.”

In April, I gave a workshop over at Silver Star in Bossier City, and the couple attending had been into my office previously. I say, “You guys were in our office in either 2015 and 2016.” And I said, “What changed?” He huffed a little bit, welled up saying, “I had a health scare, and I’ve got a condition. I want to look you in the eye, and you let me know that (my wife’s) going to be OK.”

It was heavy, but it was such a privilege to be able to work with them and to watch their faces when we wrapped up, and they had become clients. When we were done, I said, “I’ve got your back.” That’s all he wanted. He wanted to have somebody he trusted that will make sure she’s taken care of. It’s an absolute honor to make sure she’s going to be OK.

The path that you take to get to retirement might not necessarily be the same path you take during retirement. Make sure you review with your advisor and accountant at least once a year, so a potential ticking tax time bomb can possibly be avoided.

Colin Evans is a managing partner at Evans Financial Group. Following in his father’s footsteps, Colin joined the firm in 2000. He graduated from Louisiana State University in 2001 with a bachelor’s degree in financial analysis and insurance. Citation: (1) https://www.investmentnews.com/dealing-with-widows-requiresempathy-and-patience-79649

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