Caveat Emptor – Beware of your beneficiary forms:  Estate Planning

Countless investors think their estate planning is all taken care of once they meet with an estate attorney and update their documents, but they should think twice about that. Your estate planning is not in order until you have updated your documents and made sure they are coordinated with your beneficiary designations and asset ownership arrangements.

Martin Shenkman, an estate attorney in Paramus New Jersey agrees. Says Martin: “People don’t realize the importance of this. A carelessly named beneficiary on a financial account can cause a loved one to be disinherited, a disabled child to lose government benefits and heirs to be slapped with a big tax bill”. Mr. Shenkman sees so many cases like this that he has coined a term for it: “Bank teller estate destruction.”

Have your documents been updated and are they properly coordinated with your beneficiary designations and asset ownership arrangements?

Tax on Social Security In Retirement:  Retirement Tax Planning

A prudent and effective tax strategy during your employment years will most likely need to be modified in retirement. Once earned income ceases and income from retirement plans, investments, and Social Security commences, tax liabilities change.

The impact of the changes is primarily driven by the assets that we have little tax control over once we reach 70.5, which include IRAs, 401ks, and pensions. Reaching age 70.5 triggers RMDs (Required Minimum Distributions). Distributions from tax deferred retirement accounts such as an IRA or a 401k are generally taxed at the ordinary tax rate. Distributions from a Roth IRA or Roth 401k are income tax free as long as the account has been opened for at least five years and the account holder is 59.5.

Investment income such as stock dividends and bond interest are taxed differently, especially when they are held outside of a retirement account. Realizing gains on stocks that have been held for one year or more can be taxed at a more favorable rate than the ordinary rate. Interest on bonds and gains realized on short-term positions less than one year, are taxed at the ordinary rate.

Retirees with excessive assets in retirement accounts subject to RMDs and with non-retirement investment income may want to confer with a tax professional and financial advisor to help determine when to take Social Security.

Retirement also introduces us to Social Security which, contrary to popular belief, can be taxed. Eligibility for Social Security benefit payments begins at age 62, but can be postponed until age 70. A key determinant as to when to start receiving Social Security may be contingent on the amount of retirement assets in retirement accounts subject to RMDs. This is where tax strategies can vary dramatically.

Do you have a retirement tax planning strategy?