Retirement Savings and Estate Planning: What You Need to Know

Retirement Savings and Estate Planning: What You Need to Know

Throughout your lifetime, you will acquire and grow assets such as bank accounts, retirement accounts, a home, vehicles, and more. As your portfolio grows over time, you will need to decide how it will be split up in the event of your death.

If you haven’t started, Nerdwallet has a helpful seven-step plan to begin estate planning, including creating an inventory and assessing your family’s needs, reviewing and designating beneficiaries, establishing directives, and more.

Estate planning is a normal part of life. Remember, the work you put into it today will only make the life of your beneficiaries and heirs that much simpler – and may even save them money on attorneys, taxes, and more. To learn how estate planning impacts retirement savings, and how to designate beneficiaries or pass on funds in the future, read below.

Designating Beneficiaries

When managing finances, whether that be through a traditional bank account, retirement account, or CD, it’s important to consider who will inherit your funds when you pass, such as through a will or beneficiary designations. According to Trust and Will, the key difference is that a will provides instructions on how to handle the assets in your estate, whereas a beneficiary destination is for a specific asset. In the case that your will and beneficiary do not match for a specific asset, the beneficiary overrides the will.

Many financial institutions require you to fill out beneficiary forms when you open an account, meaning that anyone on the form will be contacted to inherit your funds. You can split the amount between people however you’d like, but it has to be in writing.

Reviewing beneficiaries regularly is important as you experience changes throughout your life including marriage, divorce, children, or the loss of loved ones. Regardless of the situation, you will want to ensure that your beneficiaries are up-to-date at all times. Read our blog on designating beneficiaries or a more comprehensive look at what you need to know.

The Role of Estate Planning in Retirement Savings

Planning for retirement is an important part of financial planning because it ensures you have enough money to pay for everyday expenses, travel, rising medical costs, emergencies, and more in post-career years.

On the other hand, estate planning helps you plan for a future without you in it. By assigning your assets, such as money, homes, vehicles, artwork, jewelry, and more, to family and loved ones, you are setting guidelines ahead of time so they don’t have to.

At some point in your life, you will create a will, which will be revised as you experience life changes. However, according to Trust & Will, depending on your assets and needs, you may also need to establish a trust as a way to pass on and manage assets to your beneficiaries.

Finally, you will also need to include documentation in your estate, such as the Financial Power of Attorney. These documents will help you and your loved ones in the instance that you are unable to make decisions for yourself due to a medical condition such as dementia, Alzheimer’s, or a coma. Trust & Will notes that selecting a Financial Power of Attorney is important early on in life so you can ensure that your finances are handled by someone you trust and selected.

With all of the above combined, you are protecting your retirement plan. An estate plan ensures that your designated loved ones and beneficiaries will inherit your assets as determined by your will and Financial Power of Attorney. This includes funds from your 401(k), IRAs, investments, and more.

Other Ways to Use Retirement Savings

Protecting your hard-earned retirement savings is important. While beneficiaries can acquire money through your will or beneficiary designations, there are other ways to assign your funds to ensure that they are being used effectively. Entrepreneur notes a few below:

  • Buying a Life Insurance Policy: If you hope to leave a solid financial foundation behind, then getting a life insurance policy is a great way to accomplish that. These policies ensure that the insurance plan’s proceeds are transferred to your beneficiaries as a tax-exempt option. Without having to pay income tax on the funds, your beneficiaries will have money that takes them further.
  • Investing in Real Estate: If you have extra retirement funds to spend, consider purchasing real estate property to pass down to your heirs. Houses and land are versatile forms of wealth that allow beneficiaries to use for themselves or sell for considerable amounts of money.
  • 529 College Savings Plan: If you have children or grandchildren considering secondary education, having money in a 529 College Savings Plan can provide great benefits to your beneficiaries and heirs. Not only may they be entitled to a partial or full tax deduction for contributions, but a massive expense for their future will also be taken care of.

There are many ways to distribute your retirement savings, and sometimes it’s better to simply assign the 401(k) or IRA funds to a beneficiary rather than using the funds to purchase other assets. However, every financial situation is different, so spend time researching ways to get the most out of your retirement savings before you start marking it off your to-do list.

Tax Implications of Estate Planning

When you pass away, your estate may be subjected to estate taxes or inheritance taxes. While the terms and rates are dependent on the state you live in and how much your estate is worth, it’s still a huge consideration in estate planning.

When you pass away, the IRS will determine the value of your estate, which will be taxed if it exceeds a specific amount. Learn more about estate planning taxes through the IRS.

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