When it comes to retirement planning, most people focus on two main phases: the accumulation phase and the decumulation phase. Folks want to know how much they need to save and how to allocate their investments. Then, once they retire, they want to ensure their investments generate steady income and that it’s done in a tax-efficient manner.

However, there are some less obvious “success taxes” that retirees might face due to their sizable asset base. These include required minimum distributions (RMDs), which can push them into higher tax brackets, and Medicare’s IRMAA surcharges that kick in during years of high income. The good news is these challenges can be managed with proper planning — the key is having a financial advisor who brings these issues to your attention before they sneak up on you.

One often-overlooked area in retirement planning is the so-called widow's trap, also known as the widow penalty. It tends to fall between traditional retirement planning and long-term survivor planning, and it’s a hidden financial risk that affects the surviving spouse.

When couples file jointly, they benefit from a higher standard deduction and wider tax brackets. However, if one spouse passes away unexpectedly, the surviving spouse faces lower tax brackets and a smaller standard deduction. This often means higher taxes on less income for the survivor.

And it’s not just retirees who are affected. Even younger couples in the accumulation phase can feel the widow's trap. Take John and Jane, a couple in their 30s who make $140,000 together. Filing jointly, they pay taxes at a lower rate—around 12% and get a standard deduction of roughly $31,500. But if John passes away, Jane must file as a single taxpayer. Her income drops to about $105,000, but with narrower tax brackets and a lower standard deduction, she could be pushed into a higher tax bracket and end up paying more taxes despite earning less.

For someone like Jane, it’s crucial to update paycheck withholdings and work with a CPA to ensure she’s filing correctly—potentially as Head of Household to reduce her tax burden.

For retirees who are fortunate enough to live long lives, it’s essential to think ahead. Good planning can soften the blow of the widow trap.

Here are some smart strategies to consider:

Tax Diversification of Retirement Accounts

Having a mix of traditional tax-deferred, Roth (tax-free), and taxable accounts gives you flexibility to withdraw funds in the most tax-efficient way during retirement.

Strategic Roth Conversions While Married

One major source of pain from the widow trap comes from RMDs, which can push you into higher tax brackets once you hit the required withdrawal age. If a spouse passes, tax brackets get narrower, and your tax bill can jump. By converting some traditional retirement dollars to a Roth IRA while you're still married (and in a lower tax bracket), you reduce your future RMDs and create a pool of tax-free income.

Qualified Charitable Distributions (QCDs)

If your RMDs exceed what you need for living expenses, consider directing those distributions straight to a qualified charity through a QCD. This helps satisfy RMD requirements without adding taxable income.  QCDs are available at the account holder’s age of 70 ½.

Asset Location

Position tax-inefficient assets—such as bonds and actively managed funds that generate taxable income—inside tax-deferred accounts like IRAs or 401(k)s. Meanwhile, hold tax-efficient assets—like appreciating stocks, index funds, and municipal bonds—in taxable accounts. This approach leverages the step-up in basis at death, helping to minimize future tax burdens and enhance after-tax returns, thereby preserving wealth over time. Effective asset location is a key tax strategy for maximizing retirement income and reducing the impact of the widow's trap.

If you have questions about how the widow trap might affect your financial situation or would like help planning to avoid it, our experienced advisors are here to assist you. Feel free to reach out to one of our team members for personalized guidance and strategies tailored to your unique needs. Planning ahead can make all the difference.