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Elder Law Estate Planning

Even a Late Start toward Retirement Planning is Better than None at All

“There’s never enough time to do all the nothing you want.” Bill Watterson, Calvin and Hobbes.

“The trouble with retirement is that you never get a day off.” Abe Lemons.

There are also people who wait until they become senior citizens to begin planning for retirement. That’s a little on the late side, but the important thing, says the article “Retirement Planning: Start now to help Social Security, Medicare” from Martinsville Bulletin, is to get started. That’s better than doing nothing.

It’s easier if you start earlier. Let’s consider the high school student who diligently puts away 10% of a $7.25 per hour gross minimum wage earning for a year on an average 20-hour work week. That’s $750 into a retirement plan after one year. If that student never went to college, never learned a trade, got a raise or a promotion, they would still have $34,500 in personal savings in 46 years. And since minimum wage increased those number swell to $1,560.00 for one year and $71,760.00. It’s not a lot, as retirement savings go, but it’s better than nothing.

If the same high school student put those savings into an Individual Retirement Account (IRA), more would have been saved. The more time your money has to grow through compounding, the more money you’ll have.

Saving a little money every month could make a big difference later on. This year, the average monthly Social Security benefit rounds out at about $1,460 per person, calculated by combining a worker’s highest paid years in the workplace. That’s not enough for retirement. The answer? Start saving early.

It is not as easy to build a nest egg in a few years, but it’s possible.

Many people don’t wake up to the reality of retirement, until they reach age 62. There’s still time to plan. They can put money into IRA accounts, and at age 62 they can save as much as $7,000. Those IRA contributions count as tax deductions.

Roth IRAs are a little more flexible, but there are no tax deductions with contributions. On the plus side, when money is withdrawn, you’re not paying taxes on the withdrawals.

Another important planning point for seniors: if you’ve had health issues, it’s a good idea to keep working to maintain your employee health insurance. The healthier you are, the lower your health insurance costs will be during retirement. However, health costs do tend to increase with age, so that has to be factored into your retirement planning.

For people who take a lot of medication to control chronic conditions, they’ll need to look into health insurance outside of the workplace. That usually means Medicare. Most seniors are eligible for free Medicare hospital insurance, which is Part A of a four-part option, if they have worked and paid Medicare taxes.

Part A helps pay for inpatient care in a hospital or skilled nursing facility after a hospital stay, some home health care and hospice care. Part B helps to pay for doctors and a variety of other services. Part C allows HMO, PPO and other health care organizations to offer health insurance plans for Medicare beneficiaries. Part D provides prescription drug benefits through private insurance companies.

The Social Security Administration advises people to apply for Medicare three months before they celebrate their 65th birthday, regardless of whether they plan to start receiving retirement benefits right away.

Whether you’re 27 or 57, you need to plan for retirement. You also need to have an estate plan, and that means making the time to meet with an experienced estate planning professional to discuss your life and your retirement plans. You’ll need their guidance to create a will and other documents.

Advance planning will always be better than waiting until the last minute, for retirement and estate planning.

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Elder Law Estate Planning

Retirement Minimum Distribution (RMDs) Fundamentals

Most people don’t know the rules about required minimum distributions. Also known as “RMDs,” these are the rules that require investors to make withdrawals from their retirement accounts the year that they turn 70½. However, says Forbes in the article “5 Things to Know About RMDs,” these withdrawals can have a major impact on cash flow, taxes and financial planning during retirement. They are legally required to be taken, even if you don’t need them.

If the RMD is not taken at the correct age, there will be a 50% tax on the amount that should have been withdrawn. Add to that the amount of regular income tax on the sum of money withdrawn, and you have an expensive mistake.

There are ways to soften the impact of RMDs. However, you have to know the rules before you can create your strategy. Having a game plan for RMDs will help save the money you saved for many years, and allow that retirement nest egg more time to grow.
Note that there may be some changes coming as a result of the SECURE Act and the RESA Act, if approved.

Retirement Minimum Distribution (RMDs) Fundamentals. Distribution rules that you need to know. The year you mark your 70½ birthday, that is, six months after you turn 70, you have to start taking RMDs from retirement accounts, including 401(k)s. That rule does not apply to Roth IRAs, which generally do not have any RMDs, until the owner dies.

The exception is if you are still working at a company and participating in the company’s 401(k) plan. If that is the case, you may want to roll over all your previous eligible savings into that account, to delay taking an RMD. However, there are also exceptions to this rule. They depend on your ownership stake in the company, so speak with an estate planning attorney to be sure what the requirements are for your situation.

While you’re at it, make sure that the beneficiaries listed on your accounts are correctly documented. If it’s been more than a few years since you last reviewed your beneficiaries, there may be some time bombs hidden in your IRA accounts. Divorce, death and changes of circumstances may make it necessary for you to change your beneficiaries. Do it now, while it’s on your mind. Once you die, there’s no recourse for your heirs.

When do I take my first RMD? RMDs must be taken by December 31st of each calendar year. However, the first RMD must be taken for the year in which you turn 70½. You can delay that payment until April of the following year. If you end up taking two big distributions, will it throw your tax planning off? Will you be bumped into a higher tax bracket? This is why you need to plan your RMD out carefully. It may be better for your overall situation to take the RMD, as soon as you are eligible.

Accuracy counts. You can’t rely on an online calculator, since the rules are not one size fits all. Let’s say your spouse is ten years younger than you and is your sole beneficiary. You’ll need to use the Joint Life and Last Survivor Table. There’s also the Uniform Lifetime Table, but that doesn’t apply here. Check with professionals to be sure you are taking the right amount.

Where does your RMD come from? Even if 70½ is a few years away, it’s good to have a plan for how RMDs will impact the distribution of your investment portfolio. You have options, so you want to make a good choice. For example, do you want distributions to be made in proportion to the percentage of each of your holdings in your portfolio? Let’s say 40% of your retirement investment is in short-term bonds, then you would take out 40% from your investment holdings. Or do you want to take a percentage from specific holdings?

What about charitable giving? Once you turn 70 ½, you can directly transfer funds from a traditional IRA to a charity, which can reduce your tax burden. However, this must be done properly, directly to the charity.

The rules of RMD are complicated, and mistakes can be expensive. Think about your strategy early on, to make sure it’s done right.

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Elder Law Estate Planning

Retirement Is Not Tax-Free

What many people don’t realize that when they start drawing funds from those 401(k)s, they’re taxed. One of the reasons the accounts are so popular, is that a traditional 401(k) is funded from pre-tax paychecks, so the money deposited into the plan and any gains on the investment are not taxed until the money is taking out. These withdrawals are called “distributions” and there are strict rules about Required Minimum Distributions, known as RMDs.

In the article “How 401(k) savers can avoid a nasty surprise come retirement,” Market Watch advises readers that these contributions are worthwhile, since they lower taxable income. Contributing enough can even move a taxpayer into a lower tax bracket for a given year, if they are able to do so.

However, there’s always payback where Uncle Sam is concerned. In this case, when distributions are taken, they are subject to ordinary income taxes. That’s why it’s called a “tax-deferred” account—taxes are deferred or put off. They aren’t tax free.

People who work in estate planning or personal finance tend to assume that everyone knows this, but that’s not the case. Just as they are about to retire, a great saver may look at their 401(k) balances and be so happy to consider how all their hard work and diligent savings have paid off. However, even if they have a million dollars in an account, the reality is, that $1 million is actually worth more like $700,000, if they are paying federal, state and local taxes. The same is true with balances of any size.

It is still important to continue saving in a 401(k) or any other kind of retirement account. However, you must keep that tax obligation in mind, when you’re setting any kind of financial retirement goals. Tax rates in the future are unknowns, but plan on roughly 20% in federal tax, and maybe another 3–10% in state and local taxes, depending upon where you live.
If you use an online retirement calculator to help you plan and estimate your goals and costs in retirement, make sure that the calculator takes taxes into account.

Everyone’s strategy for building a retirement nest egg is different. However, there are certain rules to consider, based on age. Once you turn 59½, you are allowed to take money from your 401(k) without penalties, but you will probably pay at least 20% in federal income tax, plus state and local income.

If you are taking withdrawals at this age and still drawing a paycheck, you might be moving yourself into a higher tax bracket. If you turn 65, withdrawing enough to move into a higher tax bracket may also mean that you are paying higher Medicare premiums.

For those who continue working into their 60s and 70s, a good goal is to preserve your 401(k) accounts for as long as possible. You are not obligated to take any money out of a traditional 401(k), until you turn 70.5. At this point, the Required Minimum Distributions must begin. Legislation pending as of this writing (the SECURE act) may change the age requirement for RMDs, but until the legislation becomes laws, the age remains at 70.5.

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Elder Law Estate Planning

401(k) Withdrawals and Taxes

A simple way to decrease the taxes you have to pay on 401(k) withdrawals, is to convert to a Roth IRA or Roth 401(k). Investopedia’s recent article, “How to Minimize Taxes on 401(k) Withdrawals” explains that withdrawals from those accounts aren’t taxed, provided they meet the rules for a qualified distribution. However, you’ll need to declare the conversion, when you file your taxes.

The primary issue with converting your traditional 401(k) to a Roth IRA or Roth 401(k) is the income tax on the money you withdraw. If you’re near pulling out the money anyway, it may not be worth the cost of converting it. The more money you convert, the more taxes you’ll owe.

You can divide your assets between a Roth account and tax-deferred account to share the burden. You may pay more taxes today, but this strategy will give you the flexibility to withdraw some funds from a tax-deferred account and some from a Roth IRA account to have more control of your marginal tax rate in retirement. Remember that the five-year rule requires that you have your funds in the Roth for five years, before you start your withdrawals. This may not work for you if you’re already 65, about to retire, and concerned about paying taxes on your distributions.

Some of the ways that let you save on taxes, also make you take out more from your 401(k) than you actually need. If you can trust yourself not to spend those funds and save or invest the extra money, it can be a terrific way to spread out the tax obligation. If the individual is under 59½ years of age, the IRS allows use her to use “Regulation T” to take substantially equal distributions from a qualified plan, without incurring the 10% early withdrawal penalty. However, the withdrawals need to last a minimum of five years. However, a person who’s 56 and starts the withdrawals must keep taking those withdrawals to at least age 61, despite not needing the money.

If you take out distributions earlier while you’re in a lower tax bracket, you could save on taxes, instead of waiting until you’ll have Social Security and possible income from other retirement vehicles. If you plan ahead and are 59½ or older, you can take out just enough money from a 401(k) (or a traditional IRA) that will keep you in your current tax bracket but still lower the amount that will be subject to required minimum distributions (RMDs) when you’re 70½. The objective is to reduce the effect of the RMDs (which are based on a percent of your retirement account balance, along with your age) on your tax rate, when you have to begin taking them.

Although you’ll have to pay taxes on the money you withdraw, you can save by then investing those funds in another vehicle, like a brokerage account. Hold it there for at least a year and you’ll only have to pay long-term capital gains tax on what it earns.

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Elder Law Estate Planning

Here’s How You Know You’re an Adult: 10 Documents

Fifty is a little on the late side to start taking care of these important life matters. However, it is better late than never. It’s easy to put these tasks off, since the busyness of our day-to-day lives gives us a good reason to procrastinate on the larger issues, like death and our own mortality. However, according to Charlotte Five’s article “For ultimate adulting status, have these 10 documents by the time you’re 35,” the time to act is now.

Here are the ten documents you need to get locked down.

A Will. The last will and testament does not have to be complicated. However, it does need to be prepared properly, so that it will be valid. If your family includes minor children, you need to name a guardian. Pick an executor who will be in charge when you pass. If you don’t have a will, the law of your state will determine how your assets are distributed, and a court will name a guardian for your children. It is better to have a will and put your wishes down in writing.

Life insurance. There are two basic kinds: term insurance, which covers about twenty years, and universal or whole, which covers you for your lifetime. You need enough to cover your liabilities: your home mortgage, college funding for your kids and any outstanding debts, like credit cards or a car loan. This way, you aren’t saddling heirs with your debt.

Durable power of attorney. This document lets you designate someone to pay your bills, manage your money and make financial decisions for you, if you become incapacitated. Without it, your relatives will need to go to court to be appointed power of attorney. Pick a trusted person and have the form done, when you meet with your estate planning attorney.

Twice your annual income in savings. Most Americans don’t do this. However, if you start saving, no matter how small an amount, you’ll be glad you did. You need savings to avoid creating debt, if an emergency occurs. A cash cushion of six months’ worth of monthly expenses in a savings account will give you peace of mind.

Insurance coverage. Make sure that you have the right insurance in place, in addition to life insurance. That means health insurance, auto insurance and disability insurance.

Credit report. People with better credit reports get better rates on home and auto loans. You can get them free from the big credit reporting services. Make sure everything is correct, from your address to your account history.
A letter of instruction. Where do you keep your estate planning documents? What about your bank statements, taxes and insurance documents? What about your digital assets? Keep a list for easy access for those who might have to figure out your affairs.

Retirement plan. Most people only know they don’t have enough saved for retirement. That’s not good enough. If you aren’t enrolled in your company’s 401(k) or other retirement savings plan, get on that right away. If your company matches contributions, make sure you are saving enough to get every bit of those matching dollars. If your company doesn’t have a retirement plan, then open an IRA or a Roth IRA on your own. You should try to contribute as much as you possibly can.

Updated resume. It also helps to do the same thing with your LinkedIn profile. No matter how long you’ve been in your field, everyone looks at your LinkedIn profile to see who you are and what and who you know. Make sure you have an updated resume, so you can easily send it out, whether it’s a casual conversation about a speaking opportunity or if you’re starting to look for a new position.

A budget. Here’s how you know you’re really an adult. Budgets went out of fashion for a while, but now they are bigger than avocado toast. If you don’t know what’s coming in and what’s going out, you can’t possibly have any kind of control or direction over your financial life. Start tracking your expenses, matching with your income and making any necessary changes.

One last thing—do you have a bucket list? Don’t wait until you’re 70 to consider all the places you’d like to go or the people you’d like to meet. It’s true–you only live once, and we should enjoy the ride.

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Elder Law Estate Planning

What If My Beneficiary Isn’t Ready to Handle an Inheritance?

“There are only two ways to live your life. One is as though nothing is a miracle. The other is as though everything is a miracle.” Albert Einstein

“The old who have died live on in the young ones. Don’t you feel this now in your bereavement, when you look at your children?” Albert Einstein

A recent Kiplinger article asks: “Is Your Beneficiary Ready to Receive Money?” In fact, not everyone will be mentally or emotionally prepared for the money you wish to leave them.
What If My Beneficiary Isn’t Ready to Handle an Inheritance?

Here are some things to consider:

The Beneficiary’s Age. Children under 18 years old cannot sign legal contracts. Without some planning, the court will take custody of the funds on the child’s behalf. This could occur via custody accounts, protective orders or conservatorships. If this happens, there’s little control over how the money will be used. The conservatorship will usually end and the funds be paid to the child, when they become an adult. Giving significant financial resources to a young adult who’s not ready for the responsibility, often ends in disaster. Work with an estate planning attorney to find a solution to avoid this result.

The Beneficiary’s Lifestyle. There are many other circumstances for which you need to consider and plan. These include the following:

A beneficiary with a substance abuse or gambling problem;

A beneficiary and her inheritance winds up in an abusive relationship;

A beneficiary is sued;

A beneficiary is going through a divorce;

A beneficiary has a disability; and

A beneficiary who’s unable to manage assets.

All of these issues can be addressed, with the aid of an estate planning attorney. A testamentary trust can be created to make certain that minors (and adults who just may not be ready) don’t get money too soon, while also making sure they have funds available to help with school, health care and life expenses.

Who Will Manage the Trust? Every trust must have a trustee. Find a person who is willing to do the work. You can also engage a professional trust company for larger trusts. The trustee will distribute funds, only in the ways you’ve instructed. Conditions can include getting an education, or using the money for a home or for substance abuse rehab.

Estate Plan Review. Review your estate plan after major life events or every few years. Talk to a qualified estate planning attorney to make the process easier and to be certain that your money goes to the right people at the right time.