What Should You Do When You Turn 59½?
What should you do when you turn 591/2?

What Should You Do When You Turn 59½?

Minor stuff aside, there are some real financial benefits to reaching age 59½, says Kiplinger in the article “What Should You Do When You Turn 59½?” Here are some important tasks to accomplish when you turn 59½ that will help you explore new opportunities and build a strong foundation for your future retirement.

Review Your 401(k). At age 59½, you reach the magic age when you can start taking money out of your retirement accounts without penalty. That’s not to say it’s time to drain your accounts, but it does give you more options.

Create a Safety Net. Hopefully you know about the benefits of having an emergency fund. Having a “rainy day” fund can give you peace of mind.

Until now, your only real options to beef up such a fund were a savings or money market account that couldn’t even keep up with inflation. Now that you’re 59½ and the withdrawal penalty is no longer applicable, you can actually use your 401(k) as a readily accessible, tax-deferred safety net. Plus, in a retirement account, you can invest some of the funds for growth. Still, you should keep a bit of cash for emergencies. In addition, withdrawals from retirement accounts will be taxable because you’ve never paid taxes on that money.

Take Advantage of Catch-Up Contributions. The IRS lets folks age 50 and older contribute extra to their retirement accounts—both IRAs and employer-sponsored accounts. This not only builds your retirement savings, it can decrease your taxable income. A lower income can keep you in a lower tax bracket and make you eligible for more tax deductions. That saves money on taxes.

Look into an In-Service Rollover. The major complaint with 401(k) plans is the lack of investment options available within a given plan. The average 401(k) plan has fewer than a dozen options, according to FINRA. Compare that with the variety of options available on the open market. Once you hit 59½, you may be eligible for an in-service rollover, which lets you to move 401(k) funds into an IRA without penalty while still working at the same job. It’s a unique opportunity to access better investments that’s not available to most workers. There are more investment options within an IRA and greater flexibility and control.

Monitor Your Spending. One of the tough things about retirement planning when you’re younger is that you have almost no idea what your retirement needs will be. However, at 59½, it’s near enough that you should have a better sense of what your needs will be.

Start tracking your spending to create a retirement budget. This will help you decide when to retire because you’ll be able to see the trade-offs between working longer and the lifestyle you’ll be able to afford in retirement.

Remember Health Care. Start to consider your health care. A common mistake people make when retiring early is to neglect health insurance. While you can access your money penalty-free now, you don’t have access to Medicare until age 65. If you’re playing with the notion of retiring before 65, start looking into your health care options now and make certain that you have coverage until you reach Medicare eligibility.

Reference: Kiplinger (June 28, 2019) “What Should You Do When You Turn 59½?”

 

What are the Most Common Beneficiary Designations Mistakes?
Common mistakes on beneficiary designation forms.

What are the Most Common Beneficiary Designations Mistakes?

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s, IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to name a beneficiary. Many people never name a beneficiary for retirement accounts or life insurance. If you don’t name a beneficiary for life insurance or retirement accounts, the financial company has it owns rules about where the assets will go after you die. For life insurance, the proceeds will usually be paid to your estate. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
  2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed conservator will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your attorney about creating a trust to be named as the beneficiary.
  3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
  4. Failing to update your beneficiaries. Since there are life changes, make sure your beneficiary designations are updated on a regular basis.
  5. Failing to review beneficiary designations with your attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

 

How Do I Make the Right Estate Planning Moves When I Divorce?

The Journal Enterprise explains in its recent article, “5 Estate Planning Moves If You Are Getting Divorced,” that the following tips will help you get your plans in order, so your final wishes will be carried out later.

Medical Power of Attorney. This is also called a healthcare proxy. This person is named to make decisions on your medical care, if you’re ill or injured and can’t state your medical care decisions. Unless you make the change, your ex-spouse will have this right.

Financial Power of Attorney. Like a healthcare proxy, this is someone you select to take charge, if you become incapacitated. This person has authority over your financial decisions, and it means they have the authority to pay your bills, access your bank and investment accounts, collect and cash your paychecks and make financial decisions for you. You want to be certain that your assets are protected, and your financial obligations are met, while you’re unable to act on your own behalf. Most people name a spouse, but if you get divorced and don’t switch this designation, your spouse will still be your financial power of attorney and will retain access to your finances.

Create a List of Things to Change After Your Divorce. A divorce can freeze some assets and accounts, which remains in effect until it’s finalized. Therefore, you won’t be able to change the beneficiary on life insurance policies, pensions and other types of accounts. Ask your estate planning attorney to find out exactly what accounts will be affected. Once you know which ones are frozen, you should make a list to ensure you won’t neglect to change them, when the divorce is finalized.

Modify Your Will. In some states, you may not be permitted to create a new will, but your attorney should still be able to help you make the necessary changes. You’ll want to review your heirs. If you do have minor children and you have sole custody, you may want to designate another person as their guardian. If you named your spouse as executor of your will, you may want to consider changing that.

Modify Your Trust. You may have a revocable living trust, in addition to a will. One of the advantages of a revocable trust is that it doesn’t go through probate, so your heirs get a bigger inheritance more quickly. If you have a revocable trust, talk to your attorney about changing it after your divorce.

If you don’t create a new estate plan after your divorce, your assets may not go to the right beneficiaries, or your ex-spouse may end up with rights you didn’t intend.

Reference: Journal Enterprise (March 20, 2019) “5 Estate Planning Moves If You Are Getting Divorced”

 

How Will My IRA Be Taxed?
IRA taxation

How Will My IRA Be Taxed?

The most common of IRA tax traps results in tax bills through Unrelated Business Taxable Income (UBTI). The sources of business income from stocks, bonds, and funds like interest income, capital gains, and dividends are exempt from UBTI and the corresponding tax (the Unrelated Business Income Tax or UBIT).

Fox Business’s recent article, “Your IRA and taxes: Don’t get a surprise tax bill” explains that IRAs that operate a business, have certain types of rental income, or receive income through certain partnerships will be taxed, when the total UBTI exceeds $1,000. This is to prevent tax-exempt entities from gaining an unfair advantage on regularly taxed business entities.

UBIT can take a chunk from an IRA, and the Tax Cuts and Jobs Act of 2017 replaced the tiered corporate tax structure with a flat 21% tax rate. That begins in tax year 2018 (this tax season). These tax bills often have penalties, because IRA owners aren’t even aware that the bill exists.

Master Limited Partnerships (MLPs) held within IRAs are a good example of how UBTI can catch investors by surprise. MLPs are fairly popular investments, but when they’re held within an IRA, they’re subject to UBIT. When the tax is due, the IRA custodian must get a special tax ID number and file Form 990-T to report the income to the IRS. That owner must pay the tax, and is typically unaware of the bill, until it arrives as a completed form to be submitted to the IRS (completed and signed on behalf of the owner). In some instances, the owner may have to pay estimated taxes throughout the year. This can mean a significant underpayment penalty.

Working with prohibited investments will also result in a tax bill. Self-directed IRAs can violate the rules. Alternative investments such as artwork, antiques, and precious metals (with some exceptions) are generally considered as distributions and are subject to taxes.

Prohibited transactions are a step above prohibited investments and can result in the loss of tax-deferred status for the entire IRA. This includes using an IRA as security to obtain a loan, using IRA funds to purchase personal property, or paying yourself an unreasonable compensation for managing your own self-directed IRA. Executing a prohibited transaction can result in the entire IRA being treated as a taxable distribution to you.

Therefore, like fund holdings, ETFs, and other investments, it’s critical to understand exactly what you own and how to deal with the tax liabilities.

Reference: Fox Business (March 6, 2019) “Your IRA and taxes: Don’t get a surprise tax bill”

 

How Do I Plan for a Blended Family?
How do I plan for a blended family?

How Do I Plan for a Blended Family?

A blended family (or stepfamily) can be thought of as the result of two or more people forming a life together (married or not) that includes children from one or both of their previous relationships, says The Pittsburgh Post-Gazette in a recent article, “You’re in love again, but consider the legal and financial issues before it’s too late.”

Research from the Pew Research Center study reveals a high remarriage rate for those 55 and older—67% between the ages 55 and 64 remarry. Some of the high remarriage percentage may be due to increasing life expectancies or the death of a spouse. In addition, divorces are increasing for older people who may have decided that, with the children grown, they want to go their separate ways.

It’s important to note that although 50% of first marriages end in divorce, that number jumps to 67% of second marriages and 80% of third marriages end in divorce.

So if you’re remarrying, you should think about starting out with a prenuptial agreement. This type of agreement is made between two people prior to marriage. It sets out rights to property and support, in case there’s a divorce or death. Both parties must reveal their finances. This is really helpful, when each may have different income sources, assets and expenses.

You should discuss whose name will be on the deed to your home, which is often the asset with the most value, as well as the beneficiary designations of your life insurance policies, 401(k)s and individual retirement accounts.

It is also important to review the agents under your health care directives and financial powers of attorney. Ask yourself if you truly want your stepchildren in any of these agent roles, which may include “pulling the plug” or ending life support.

Talk to an experienced estate planning attorney about these important documents that you’ll need, when you say “I do” for the second (or third) time.

Reference: Pittsburgh Post-Gazette (February 24, 2019) “You’re in love again, but consider the legal and financial issues before it’s too late”