Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member FINRA/SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s financial focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate, James, joining me again this morning. Another pleasant, almost fall morning out there today. We were talking on the way up. It’s almost baseball postseason time coming up, and seeing how those last couple games are going to determine the finishing standings of who’s going to be playing who and some of that excitement that’s coming into it. We talked a lot that there’s a lot going on now, as far as you have NFL season back, you have college football back, you have basketball, you have NBA basketball, high school sports. There’s a lot going on right now.
James Nelson:
Yeah, busy time of year. And if you’re a sports fan, it’s a good time of year. Yeah, it’d be interesting to see if my Cubs and your Reds end up playing each other in a round of the playoffs. It could shake out that way.
Nate Kreinbrink:
Never know how it’s going to happen here. You go back a few months and not knowing if any of this was even going to happen. It’s great to be able to see that happening and at least getting a partial season, whatever that may look like, in, and seeing how that turns out.
James Nelson:
Yeah, we’ll take it, and the playoffs should be pretty fun.
Nate Kreinbrink:
Hopefully, hopefully. So today’s program, I know we talked a little bit last week, as far as Social Security benefits, and not necessarily the claiming dates, but the two terms of spousal benefits and survivor benefits. And the similarities, and most importantly, the differences between the two. And how, if you have the unfortunate circumstance of a spouse passing away, what the options for Social Security entails with that.
Nate Kreinbrink:
And we’re going to continue on along those lines. I know a lot of the financial planning, the tax planning, and a lot of that, that we talk about week after week with James and I, John and I, when he’s on. Andy Fergurson with NelsonCorp Tax Solutions, when he’s on. A lot of that planning and the discussion that we have is when both spouses are alive. And granted there’s a lot that’s going into that, and that’s obviously putting the pieces in place. But what oftentimes is overlooked is what happens when that unexpected happens?
Nate Kreinbrink:
I know we talk a lot about let’s plan for the worst, but hope for the best. And no one wants to think about the time when they lose a spouse or a loved one that goes into it. But there are some impacts that happen to that surviving spouse, and if you’re not aware of them and knowing what’s going to happen, it’s a lot of times pretty detrimental to the overall plan and to the overall assets that an individual has that’s left surviving after the death of a loved one.
Nate Kreinbrink:
One of the most important things, and again, oftentimes overlooked, is just simply the filing status of that surviving spouse. They’ve been married, filing jointly, and had the income limits in those brackets for so long. Then all of a sudden, that spouse passes away. And now all of a sudden, that surviving spouse is filing as a single taxpayer. And a lot of times, that income doesn’t necessarily quite change quite as much as what they think. So again, they’re getting pushed up into higher tax brackets and everything, usually from a negative standpoint, that that brings along with it.
James Nelson:
Yeah, no doubt. You just take a look at the individual versus the joint tax return at the first level, which is the 12% bracket. You can make up to $80,000 and stay in that 12% bracket if you’re a married couple. That number gets cut in half, down to 40,000, if you’re an individual. And like you said, Nate, generally speaking, if a spouse is lost, the income isn’t reduced by half. The surviving spouse gets to keep the larger Social Security benefits, so that hangs around. If there’s a pension, generally, there’s a spousal benefit there. Whether that’s 50% or 75%, in some cases, even 100% of that benefit sticks around, for again, that surviving spouse. And then the third thing is the liquid assets. So if there’s any tax exposure or any money being drawn out of retirement accounts, that number is going to stay the same. We might consolidate accounts, but the income that that can generate is going to be virtually the same as what it was when there was a married couple.
James Nelson:
So you’re right. The tax exposure goes up dramatically in most cases, and just from the fact that the income doesn’t change a whole heck of a lot, in some cases. So it’s important to plan and try to head some of those things off. People say, well, what can I do? We go back to looking at Roth conversions and positioning of assets in a more tax-advantaged way when you’re in those lower tiers of income. All of that positioning that takes place, just before retirement, and early years in retirement can really go a long way in the event somebody were to pass away.
Nate Kreinbrink:
Right, and I think one point that you said as far as being able to consolidate those IRA accounts into the surviving spouse’s name, but the question then that always comes up is, do I still have to take an RMD from those assets? And the answer is yes. They all can be bunched together, but you still have to take that RMD if you’re age 72 and above every single year. Again, whether you need that income or that money or not, you have to take out that certain percentage every single year, and everything that’s coming out of those tax-deferred assets is taxable to you in that year that you take it out.
Nate Kreinbrink:
And James mentioned Roth conversions. That’s another benefit of the Roth is that the RMD is not required with Roth accounts. So again, if you wanted to shift assets in lower tax years, especially some of that planning, if both spouses are still alive, you’ve got some room in some lower tax brackets. Let’s maybe willingly position some assets, pay taxes for them at a lower rate, get them into a more favorable tax bucket with the Roth, and then not have to necessarily worry about that again, should the unfortunate circumstances happen.
Nate Kreinbrink:
And another big thing, when I do a lot of the financial planning for people that we work with, is looking at the Medicare. And again, this is another thing that people don’t quite understand is that your Medicare Part B premium and any drug plan that you have is tied to your income. So there’s five different tiers of Medicare premiums that you pay, and those tiers are based off of your income. If you’re in the lower bracket, you pay the normal thing, which I think this year for Part B is like 144.50, or right around that amount. If you make above a certain amount, that almost doubles, and then it continues to go up from there.
Nate Kreinbrink:
So if we’re looking at those income things, an individual spouse passes away, they still have the RMD that’s coming out. They still have pension income. They maybe still have the larger Social Security benefit. They’re oftentimes being pushed very, very close to at least not that second tier, but oftentimes into that third tier, whenever that spouse passes away. And now, all of a sudden, you start looking at your expenses, and what you thought you needed to fund your retirement is now a lot higher because you’re paying more for your Medicare. Again, you are not getting any more coverage. You are just paying more based off of the income that you have coming in and the tax filing status that you are filing as. So again, all this stuff kind of comes into play. And we look at it to say if both spouses live to be 95 years old and they both pass away at literally the same date, this again, doesn’t apply.
Nate Kreinbrink:
But again, we talk to people. And planning for that worst-case scenario, the unexpected circumstance, that one spouse passes away earlier, much earlier than anticipated, or than the average life expectancy. Well, now all of these issues and these problems creep into the plan much earlier than what we even expected. So again, looking at some of the things, and when we look at plans, it’s not necessarily that transition from working to retirement. Things are pretty much done, and in short of a time, those things usually take care of themselves. Where the planning really comes into play and where it really benefits couples is looking 10 years, 20 years, 30 years down the road. And again, we don’t know exactly what taxes are going to be, but we can plan to have some options for whatever that can throw at us. But again, the unexpected circumstance of a spouse passing away. What is that going to look like for the surviving spouse?
James Nelson:
Yeah. And while we’re on the topic, the other thing, just from an estate planning perspective, is we urge people to really look at those beneficiary forms on the retirement accounts at work. It’s easy to just put money away and kind of forget about it. But if there’s a divorce or someone in the family passed away and they happened to be a beneficiary, it’s really important to keep those up-to-date and keep a close eye on them. The other thing is life insurance policies.
James Nelson:
We see it all the time, Nate. A policy that was sold 30 years ago, and a client can’t remember who the beneficiary is on that. That can be a problem. Update those, make sure all those beneficiaries are current. It really helps the surviving spouse in a bad situation like we’re describing here today. Try to streamline things as much as we can. They don’t need to worry about the financial aspect after losing a spouse. That’s hard enough. But if we can make life a little bit easier by just keeping beneficiaries current and staying on top of those things from an estate planning perspective, we want to do it.
Nate Kreinbrink:
Right. A lot of this stuff is again, things that people just don’t think of, they overlook. But again, also very important to how these things play out, should again, the unfortunate happens. No one likes to think about the death of a spouse, the unexpected passing. But again, it’s our duty to have these discussions just so people are aware on how these things are going to play out. So you have questions, as always, feel free to give us a call. We’d be happy to sit down with you, look over your situations and explain, okay, if this happens, how you’re set up right now, this is what would happen.
James Nelson:
Right.
Nate Kreinbrink:
Maybe look at then possibly some planning that we can do to help better that situation. Before we do run out of time, I did want to mention that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of September will be donated to the Harvest Hurrah event, on October 17th, at the First United Methodist Church, in Clinton. James, as always, appreciate you joining me this morning.
James Nelson:
Sure.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member FINRA/SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.