How Retirement Planning Can Impact Your Estate Planning StrategyEmployment-based retirement plans are still an important part of many Indiana residents’ portfolio, but many people in the state are still only somewhat aware of how those plans can impact their end-of-life planning efforts. According to recent estimates, about 63% of all workers in Indiana have some type of access to retirement plans offered or sponsored by the companies that employ them. About 57% of those employees actually choose to take advantage of those plans. For those employees, it is important to understand how retirement planning can impact any estate planning strategy.
Retirement Accounts Avoid Probate
One thing you probably don’t have to worry about when it comes to your retirement account is the probate process. With employer-sponsored plans, plan holders are typically required to name a beneficiary for the account. That is designed to ensure that your plan benefits are inherited by your chosen recipient when you pass away. As long as you took the time to name that beneficiary, then the payouts should go directly to that person without the need for probate.
The problem many retirement account owners face is that we all tend to forget about these plans when we’re engaged in our estate planning efforts. Your estate planning attorney needs to know about all of these accounts so that he or she can help you to create a plan that encompasses all of the real assets you own. This can be especially important when your estate plan strategy needs to include Medicaid planning as well, since those retirement funds can play a major role in determining whether or not you’ll be able to qualify for the benefits you might someday need.
Managing IRAs and 401(k) Plans
Individual Retirement Accounts (IRAs) and 401(k) plans have exploded in popularity in recent decades, and many millions of Americans have a tremendous amount of money in their individual accounts. By some estimates, the nation’s workers and retirees have more than $17 trillion worth of retirement wealth in those accounts – enough to nearly pay off the entire national debt! Obviously, plans like those represent a substantial portion of many citizens’ personal wealth.
Most people who own these types of accounts understand that there are important tax advantages to doing so. With traditional IRAs and 401(k) plans, those tax benefits end when you die and a beneficiary takes a withdrawal. At that point, the deferral of taxes disappears and the government treats the money just as it would any other type of taxable income. It is important to understand that, since the inheritance from a retirement account is treated in a vastly different manner than the other assets your beneficiaries typically inherit.
Within the context of your estate planning strategy, these tax benefits can provide you with many advantages. As you deposit money into any traditional IRA or 401(k), it becomes tax-deductible – enabling you to decrease the amount of taxable income you have by the exact amount that you contributed throughout the year. Obviously, that’s a tremendous benefit when you’re trying to keep your tax burden as low as possible.
There are investment benefits as well. As you save money through those tax deferrals, you can invest that money in a way that earns even more income – and the profits from those investments can often be tax-free as well. These tax benefits can enable you to engage in the type of effective estate planning that most people associate with only the truly super-rich, ensuring that your future needs and legacy plans are adequately met.
When you retire, of course, those tax deferrals will end as you begin to take your required withdrawals from your various retirement accounts. For most people, however, that is not really a problem since retirees tend to settle into lower tax brackets when their working years are done. As a result, many people find that the taxable income they receive from their retirement assets tend to have little to no real impact on their tax obligations in retirement if they’ve planned ahead.
Roth IRAs and their Impact
The Roth IRA is something far different when it comes to tax-related matters. With the Roth, you receive no tax deductions for your contributions, but if you make sure to leave that money in the account for a minimum of five years then all of the income in the account will accumulate without any additional tax burden. Even better, since you received no tax deduction for those contributions, you are entitled to make withdrawals tax-free later.
Make Retirement Planning Part of Your Estate Planning Strategy
If you have these or other types of retirement accounts, you need to ensure that you work to determine and manage their impact on your overall estate planning strategy. Choices like who to name as a beneficiary, and how much money to allocate for contributions can all have a major effect on what your estate plan looks like when it’s done.
If you anticipate that you might need nursing home or other long-term care at some point in the future, it is important to plan ahead for that as well. Your retirement income may be counted for purposes of determining Medicaid eligibility, unless you carefully structure your estate plan to prevent that from happening. This is definitely not something that you should attempt on your own, however, since mistakes can be extremely costly and could leave you without the benefits you’re relying on to pay for that expensive care.
Get the Help You Deserve
Estate planning is a complex process that requires the expertise and experience that only an estate planning attorney can provide. At Frank & Kraft, Attorneys at Law, our team understands how important it is that sound retirement planning be taken into consideration when you’re developing your estate plan. We’ll work with you to ensure that you maximize the benefits afforded by your retirement accounts, even as your estate plan continues to help you achieve your retirement and end-of life goals. To find out more about how we can help you with these important issues, visit our website or call us at (317) 684-1100 today.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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