A Pet Trust will keep your Animals Safe

October 11, 2022

For one woman in the middle of preparing for a no-contest divorce, the idea of a pet trust was a novel one. She was estranged from her sister and didn’t want her ex-husband to gain custody of her seven horses, three cats and five dogs if she died or became incapacitated. Who would care for her beloved animals? Creating a pet trust will keep your animals safe.

The solution, as described in the article “Create a Pet Estate Plan for Your Fur Family” from AARP, was to form a pet trust, a legally sanctioned arrangement providing for the care and maintenance of companion animals in the event of a person’s disability or death.

Creating a pet trust and establishing a long-term plan requires state-specific paperwork and funding mechanisms, which are different from leaving property and assets to human family members. An experienced estate planning attorney is needed to ensure that the protections in place will work.

Shelters nationally are seeing a big increase in animals being surrendered because of COVID or people who are simply not able to take care of their pets. Suddenly, a companion pet accustomed to being near its human owner 24/7 is left alone in a shelter cage.

When pet parents have not made plans for their pets, more often than not these pets end up in shelters. However, not all animal shelters are no-kill shelters. In 2021, data from Best Friends Animal Society shows an increase in the number of pets euthanized in shelters for the first time in five years.

For pet owners who can’t identify a caregiver for their companions, the best option may be to find an animal sanctuary or a shelter providing perpetual care.

The woman described above had a pet trust created and funded it with a long-term care and life insurance policy. The trust was designed with a board of three trustees to check and balance one another to determine how the money will be allocated and what will happen to her assets. Her horse property could be sold, or a long-term student or trainer could be brought in to run her barn.

It is not legally possible to leave money directly to an animal, so setting up a trust with one trustee or a board is the best way to ensure that care will be given until the animals themselves pass away.

The stand-alone pet trust (which is a living trust) exists from the moment it is created. A dedicated bank account may be set up in the name of the pet trust or it could be named as the beneficiary of a life insurance or retirement plan.

A pet trust can also be set up within a larger trust, like a drawer within a dresser. The trust won’t kick in until death. These plans prevent the type of delays typical with probate but is problematic if the person becomes incapacitated.

If a trust is created as part of another trust, there can still be delays in accessing the month, if the pet trust is getting money from the larger trust.

With costlier animals likes horses and exotic birds, any delay in funding could be catastrophic.

How long will your pet live? A parrot could live for 80 years, which would need an endowment to invest assets and earn income over decades. A long-living pet also needs a succession of caregivers, as a tortoise with a 150 year lifespan will outlive more than one caregiver. Speak with your estate planning attorney about creating a pet trust that will keep your animals safe. If you would like to learn more about pet trusts, please visit our previous posts.

Reference: AARP (Sep. 14, 2022) “Create a Pet Estate Plan for Your Fur Family”

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IRAs can be used to make Charitable Bequests

October 3, 2022

While death is a certainty, some taxes aren’t. IRAs can be used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth consideration.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation. Speak with your estate planning attorney about how IRAs can be used to make charitable bequests. If you would like to learn more about charitable giving, please visit our previous posts.

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

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Maximizing Lifetime Social Security Benefits

September 28, 2022

Unless you know your date of death, it’s challenging to know how to start maximizing lifetime Social Security benefits. But, as explained in an article titled “How to Calculate Your Social Security Break-Even Age” from U.S. News & World Report, you can get close.

Age 62 is when people can start taking payments, but they will be reduced compared to those taken at full retirement age. To achieve the maximum monthly benefit, wait to take benefits at age 70. The total monthly benefit will be higher if you start collecting at a later age, but it will take a while to receive the same amount if you start taking benefits earlier. The “break-even” point comes when the payments later in life begin to exceed the value of taking payments earlier.

A number of factors are at play:

Your personal and family health history
Your spouse’s age and benefits level
Other income streams

Here’s one example. If your full retirement age (FRA) is 67 and your benefits will be $2,000 per month, but you decide to collect at age 62, your monthly benefit is reduced by up to 30%. You’ll receive $600 less if you start payments at age 62, and your monthly benefit will be reduced to $1,400. If you can wait until your Full Retirement Age, the monthly benefit will be $2,000. Every additional year after age 67 you don’t take benefits, your monthly benefit increases by 8%. This would give you a monthly benefit of $2,480 per month at age 70.

Taking the wider view, claiming at age 62 means a total of around $470,000 in benefits if you live to 90 (not including any COLAs, or Cost Of Living Adjustments). Claiming at Full Retirement Age would net about $595,000 by age 90. If you started claiming benefits at age 62, you’d have to reach age 80 to break even with what you would have received if you’d waited until Full Retirement Age (FRA).

But there are other things to take into consideration. Since none of us knows when we are going to die, deciding when to start taking Social Security benefits should look at other considerations. One is your life expectancy. In some families, living into the late 90s is common, while others rarely make it past 70. If you have a chronic medical condition like diabetes, a heart condition or cancer, you may want to start taking benefits earlier.

Another element is your spouse’s medical status and benefits. If the main breadwinner takes benefits early, the surviving spouse’s benefits will be reduced. When one spouse dies, the surviving spouse will receive the higher of the two benefits.

Whether you are still working is another factor to consider. Earning more than $19,560 while collecting Social Security means any benefits will be reduced. If you earn more than $19,560 in 2022 and are collecting benefits before your FRA, your benefit will be temporarily reduced by $1 for every $2 earned above the limit. When you reach FRA, then you can earn an unlimited amount with no reduction in Social Security benefits.

Talk with a financial advisor and your estate planning attorney for help maximizing lifetime social security benefits. If there are other income streams for the household, it may make sense to use those accounts for income and hold off on Social Security. But if funds are tight and you don’t expect to live a long life, it may make more sense to file for benefits earlier, rather than later. If you would like to learn more about social security, please visit our previous posts.

Reference: U.S. News & World Report (Aug. 26, 2022) “How to Calculate Your Social Security Break-Even Age”

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Preparing for Retirement with a Special Needs Child

September 22, 2022

For parents of children with disabilities, the challenges of preparing for retirement with a special needs child are far higher than for families with healthy, high-functioning adults. Planning for your own retirement, while needing to secure the stability and basic needs of a child who will be a dependent forever often feels impossible, according to the recent article “Planning for Your Retirement, and for a Child’s Special Needs, All at Once” from The New York Times.

Even under the best of circumstances, where there’s plenty of money available and many hands to help, caring for an adult child with special needs is emotionally and physically challenging. As parents age, they have to address their own needs plus the needs of their adult dependent. Who will care for them, provide safe and comfortable housing and care for them when their parents no longer can?

Understanding the entire picture can be difficult, even for parents with the best of intentions. First, they need to understand how preparing for their retirement will be different than other families without a special needs child. Their investments need to be multi-generational to last not just for their lifetimes, but for their child’s lifetime. They can’t be too conservative because they need long-term growth.

In addition, special needs parents need to keep a certain amount of funds liquid and easily accessible, for times when their child needs a new piece of expensive equipment immediately.

One of the parents will often leave the workforce to provide care or take a lower paying position to be more available for care. This creates a double hit; the household budget is reduced at the same time its strained by costs not covered by benefits or insurance. Paying for gas to drive to therapy appointments and day program, buying supplies not covered by insurance, like adult diapers, waterproof bedding, compression garments to promote circulation, specialized diets, etc. adds up quickly.

Even with public health assistance, finding affordable housing is not easy. One adult may need supervised care in a group home, while others may need in-home care. However, the family home may need to be modified to accommodate their physical disabilities. With wait times lasting several years, many families feel they have no choice but to keep their family member at home.

Another challenge: if the parents wanted to downsize to a smaller house or move to a state where housing costs are lower, they may not be able to do so. Most of the public benefits available to special needs people are administered through Medicaid at the state level. Moving to a state with a lower cost of housing may also mean losing access to the disabled individuals’ benefits or being placed at the end of the waiting list for services in a new state.

For disabled individuals, maintaining eligibility is a key issue. Family members who name a disabled individual as a beneficiary don’t understand how they are jeopardizing their ability to access public benefits. Any money intended for a disabled person must be held in a specialized financial instrument, such as a special needs trust.

The money in a special needs trust (SNT) may be used for quality-of-life enhancements like a cellphone, computer, better food, care providers, rent and utilities among other qualified expenses.

There are two main categories of SNTs: first party trusts, created with assets belonging to the individual. Any money in this trust must go to reimburse the state for the cost of their care. Another is a third-party special needs trust, established and funded by someone else for the benefit of the disabled individual. These are typically funded by parent’s life insurance proceeds and second-to-die life insurance policies. Both parents are covered under it, and the policy pays out after the second spouse dies, providing a more affordable option than insuring both parents separately. Your estate planning attorney can assist you in preparing for retirement with knowledge that your special needs child’s future is secure. If you would like to read more about planning for families with a disabled loved one, please visit our previous posts.

Reference: The New York Times (Aug. 27, 2022) “Planning for Your Retirement, and for a Child’s Special Needs, All at Once”

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How Do Inherited IRAs Work?

September 14, 2022

With so much of America’s savings in IRAs, it’s important to know how these inherited accounts work. The recipient of an inherited IRA can spend their inheritance however they like. However, there are strict laws concerning how long money can remain in the inherited account, as explained in the article “Understanding Inherited IRAs” from The Motley Fool. Understanding options is crucial to avoid expensive penalties and minimize taxes. So how do inherited IRAs work?

An inherited IRA is a tax advantaged investment account a person opens to transfer the funds they’ve inherited as a beneficiary of a deceased’s retirement plan. The person opening the inherited IRA is known as the beneficiary. It’s usually a surviving spouse, child, other relative or friend. If there are multiple beneficiaries, they each must open separate inherited IRA accounts.

These accounts are used to transfer the inheritance to the new beneficiary. Beneficiaries may not make additional deposits into these accounts.

You could roll the funds into your own IRA if you are a surviving spouse. By rolling the funds into an inheritance IRA, you avoid paying taxes on the inherited funds and avoid taking required minimum distributions (RMDs) until your own retirement. The goal of an IRA is to avoid taking withdrawals to give funds extended time to grow. However, you can’t take any withdrawals until you reach age 59 ½ without incurring a penalty, unless the money is in a Roth account, and it’s been at least five years since you completed the rollover to your own IRA.

Withdrawing the funds as a lump sum is permitted. However, be prepared to pay a high tax bill, unless you’re withdrawing funds from a Roth IRA owned by the original owner for at least five years. If the owner didn’t have the account for at least five years, you’ve got a big tax bill to go with your big money.

Set up a five- or ten-year withdrawal plan. You can withdraw as much money as often as you’d like and in whatever increments you wish as long as the money is completely withdrawn by the end of the fifth or tenth year. If the account owner died in 2019 or earlier, you must follow the five-year rule.

Using the Life Expectancy Method determines your annual RMD by dividing the value of the inherited IRA by the distribution period for your age as listed in the IRS Single Life Expectancy Table. You can take more money out of the IRS if you like (and are prepared to pay taxes on the withdrawals). However, if you neglect to take out at least the RMD, you’ll receive a 50% penalty on the amount you should have taken.

If you inherit an IRA from someone who is not your spouse, you’ll need to know about many other rules. The most important one is this: you may not put the inherited IRA funds into your own IRA. Next, non-spouse beneficiaries wanting to use the life expectancy methods must meet one of the following criteria:

Inheriting funds from someone who died in 2019 or earlier
Are chronically ill or disabled
Are no more than ten years younger than the deceased account owner
Are a minor child of the deceased account owner, in which case they may use the life expectancy method but only until they reach 18 years of age.

The rules concerning Inherited IRAs are complex and mistakes can be costly. It is crucial that you understand how inherited IRAs work. Speak with an experienced estate planning attorney to help you gain access to the funds and protect yourself from penalties and avoidable taxes. If you would like to learn more about managing retirement accounts in estate planning, please visit our previous posts.

Reference: The Motley Fool (Aug. 18, 2022) “Understanding Inherited IRAs”

Business Owners need an Exit Strategy

September 12, 2022

Letting go of a business is not easy, says a recent article titled “Estate Planning Strategies for Business Owners Planning an Exit” from CEOWorld Magazine. Where the exit is to sell the business or retire, or the result of an unexpected events, business owners need an exit strategy.

When should you establish a plan? It should be early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Not having an estate plan could mean your interest in the business goes through probate, which is both public and time consuming. The business may never recover from the distribution of assets and the exposure. No estate plan also means missed changes to leverage discount gifting or any other tax-reduction strategies.

Consider the following when talking with your estate planning attorney:

What is the exit strategy—to sell, be acquired or merged, have a family member take over, or sell to key employees?

How much money to do you need and want at the exit? Do you want to create a stream of income or a lump sum?

Do you have a charitable giving plan to reap tax advantages and support an organization with meaning to you? Structuring a gift far in advance avoids using a reduced fair market value and have it deemed as a cash gift.

Transferring the business to family members instead of selling to outside parties creates many different planning opportunities. With family members, emotions come into play, even though this is not always productive. If some offspring are not involved in the business, will they receive a share of the business? Do you want to equalize your inheritance? Assets can be divided by the use of trusts, for example.

You’ll want to work with an estate planning attorney with experience in creating a succession plan with a tax model. This is often overlooked in succession planning and can cause significant cash flow management issues as well as lost tax benefits.

Determine if you want to make gifts using business interests or sales proceeds early on and whether these gifts will go to family members or charities. The earlier the planning occurs, the more you can maximize the income and estate tax benefits.

Clarify your own retirement needs and goals. Business owners often fail to correctly calculate the expected investment income on after-tax proceeds from the sale of the business. Will it be sustainable enough for the lifestyle you want in retirement? If not, is there a way to structure the sale of the business to achieve your financial goal?

Business owners need exit strategy, and the earlier the planning, the higher the likelihood of a successful transition. If you would like to read more about business succession planning, please visit our previous posts.

Reference: CEOWorld Magazine (Aug. 16, 2022) “Estate Planning Strategies for Business Owners Planning an Exit”

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Managing Finances in a Blended Family

July 21, 2022

Family finances can be a big issue in any circumstances. Managing finances in a blended family is even more significant, where two sets of often well-established financial histories and philosophies try to merge into one.

Kiplinger’s recent article entitled “Yours, Mine and Ours: A Checklist for Blended Family Finances” says that a blended family is one where people have remarried, either after a divorce or the death of a spouse. Sometimes it’s older couples already in retirement. In other cases, it’s a younger couple still trying to raise children.

However, regardless of the specifics of any individual situation, when families blend, so do their finances. That is when things can get problematic, if careful planning and communication don’t occur.

Here are a few things to consider:

Money habits. People are raised with different ideas about financial issues. They’re influenced by their parents or by the circumstances of their formative years. Some people are exceptionally frugal and save every penny and seldom, if ever, splurge on something just for fun. Others spend with reckless abandon, unconcerned about the unexpected expenses that life can throw at them at any moment.

Many people are somewhere in between these extremes. If you are entering a serious relationship, you should speak to your new partner about how each of you approaches spending money.

Financial accounts and bills. Once you learn each other’s financial philosophy, you will have decisions to make. These include whether to blend your financial accounts or keep them separate. If the two of you are closely aligned with your finances and how you approach spending, you may want to simply combine everything. If you’re older, have adult children from prior relationships and are more financially established, you may decide to keep things separate.

For many, a hybrid approach may be best — keep some things separate, but have common savings, investments and household accounts to reach your blended goals.

Family. When there are children from a prior marriage — especially young children — additional financial situations will need to be addressed. Issues of child support and how it fits into the overall budget is one concern, as is the status of college funding for the children.

Talk to an experienced estate planning attorney to make sure you managing the finances of your blended family the way you wish. If you would like to learn more about blended families and estate planning, please visit our previous posts.

Reference: Kiplinger (June 27, 2022) “Yours, Mine and Ours: A Checklist for Blended Family Finances”

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Your Estate Plan should incorporate Asset Protection

July 20, 2022

Your estate plan should incorporate asset protection and tax planning. Most people don’t realize they live with a certain level of risk and it can be addressed in their estate plan, says an article from Forbes titled “You Need An Asset Protection Plan Not Just A Will.”

Being aware of these issues and knowing that they need to be addressed is step one. Here’s an illustration: a married couple in their 50s have two teenage children. They are diligent people and made sure to have an estate plan created early in their marriage. It’s been updated over the years, adding guardians when their children were born and making changes as needed. They have worked hard and also have been fortunate. They own a vacation home they rent most of the year and a small retail business and both of their teenage children drive cars. They don’t see a reason to tie asset protection and risk management into their estate plan. No one they know has ever been sued.

With assets in excess of $4 million and annual income of $350,000, they are a risk target. If one of their children were in an auto accident, they might be liable for any damages, especially if they own the cars the children drive.

The vacation home, if not held in a Limited Liability Company (LLC) or another type of entity, could lead to exposure risks too. If the property is not insured as an income-producing business property and something occurs on the property, the insurance company could easily refuse the claim if the house is insured as a residence.

If their retail business is owned by an LLC or another properly prepared entity, they have personal protection. However, if they have not followed the laws of their state for a business, they might lose the protection of the business structure.

Retirement assets also need to be protected. If they have employees and a retirement plan and are not adhering strictly to all of the requirements, their retirement plan qualification could easily be placed in jeopardy. Their estate planning attorney should be asked to review the pension plan and how it is being administered to ensure that their retirement is not at risk.

There are several reasons why tax oriented trusts would make a lot of sense for this couple. While current gift estate and GST (Generation Skipping Tax) exemptions are historically high right now, they won’t be forever.

This couple would be well-advised to speak with their estate planning attorney about the use of trusts, to serve several distinct functions. Trusts can shelter assets from litigation, decrease or minimize estate taxes when the estate tax changes in 2026 and possibly protect life insurance policies.

Estate planning and risk management are not only for people with mansions and global businesses. Regular people, business owners, and wage earners in all tax brackets, should incorporate asset protection in their estate plan to address their legacy, protect their assets and defend their estate against risks. If you would like to learn more about asset protection, please visit our previous posts.

Reference: Forbes (June 7, 2022) “You Need An Asset Protection Plan Not Just A Will”

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Advantages to Establishing a Business Trust

July 18, 2022

Business owner’s heads are frequently filled with a steady stream of questions concerning day-to-day activities. Long-range planning questions about how to expand the business, set business priorities, identify vulnerabilities, etc., are lost in the flood of events requiring immediate action. However, business owners need to keep both details and the big picture in mind, according to a recent article “5 Ways Business Owners Can Use Trusts to Benefit Their Company” from Entrepreneur. There are advantages to establishing a business trust.

Three key questions for any business owner are: how can I minimize taxes, protect assets and what kind of legacy do I want to leave with my business? All three questions can be answered with two words: estate planning. Within estate planning, trusts are a well-known tool to tackle and solve these three issues.

A trust is a legal entity created when one party (grantor) gives another party (trustee) the right to hold title to property or assets for the benefit of a third party (beneficiaries). Trusts are used to provide protection for assets for individuals and businesses. For business owners, trusts protect beneficiaries and thwart potential creditors (including previous spouses) from gaining direct access to assets held within the trust.

All future growth of assets transferred to an irrevocable trust occurs outside of the estate. It will apply to your lifetime exemption, but all future growth occurs estate tax free. Let’s say a business owner transfers a business worth $3 million into an irrevocable trust and years later, the company is sold for $17 million. The increased value is not subject to estate taxes, saving family members a significant amount of money.

It should be noted these types of trusts needs to be created with an experienced estate planning attorney to achieve the desired goals.

Assets in a trust maintain privacy. For companies and individuals who live in the public eye, placing assets in trust means only the grantor and trustee need to know about the assets. A person who lives in a small city and owns a few restaurants may not want their personal financial matters to become known when they die. Wills become public documents when the estate is probated; trusts remain private.

Litigation arising from sales of small businesses are among the most common legal actions filed against business owners. By removing assets from ownership, the business owner receives another layer of protection. You can’t be sued for assets you don’t own.

Trusts are used in succession planning and should be created to align with business legacy objectives, whether the plan is to sell the company to outsiders, key employees or keep it in the family. Succession plans must be properly documented. This is done with the estate planning attorney, CPA and financial advisor working in tandem. A succession plan should also address the goals for the business owner’s life after the business is sold or transferred. Do they want to remain on the board of directors, do they require income from the business to maintain their costs of living?

Minimizing taxes. Preparing for a liquidity event is an excellent reason to consider creating a trust. Depending upon its structure and the laws of the estate, a business owned by a trust may minimize or avoid state income taxes on a substantial portion of the estate income tax.

A succession plan, like an estate plan, needs to be created long before it is needed. Ideally, a succession plan is created not long after a business is established and revised as time goes on. When the company attains certain milestones, the plan should be updated. These are a few of the advantages to establishing a business trust. If you would like to learn more about how trusts can help your business, please visit our previous posts.

Reference: Entrepreneur (June 17, 2022) “5 Ways Business Owners Can Use Trusts to Benefit Their Company”

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Roth IRAs are Powerful Retirement Savings Tools

May 19, 2022

Roth IRAs are powerful retirement savings tools. Account owners are allowed to take tax-free distributions in retirement and can avoid paying taxes on investment growth. There’s little downside to a Roth IRA, according to a recent article “10 Reasons to Save for Retirement in a Roth IRA” from U.S. News & World Report.

Taxes are paid in advance on a Roth IRA. Therefore, if you are in a low tax bracket now and may be in a higher bracket later, or if tax rates increase, you’ve already paid those taxes. Another plus: all your Roth IRA funds are available to you in retirement, unlike a traditional IRA when you have to pay income tax on every withdrawal.

Roth IRA distributions taken after age 59 ½ from accounts at least five years old are tax free. Every withdrawal taken from a traditional IRA is treated like income and, like income, is subject to taxes.

When comparing the two, compare your current tax rate to what you expect your tax rate to be once you’ve retired. You can also save in both types of accounts in the same year, if you’re not sure about future tax rates.

Roth IRA accounts also let you keep investment gains, because you don’t pay income tax on investment gains or earned interest.

Roth IRAs have greater flexibility. Traditional IRA account owners are required to take Required Minimum Distributions (RMDs) from an IRA every year after age 72. If you forget to take a distribution, there’s a 50% tax penalty. You also have to pay taxes on the withdrawal. Roth IRAs have no withdrawal requirements during the lifetime of the original owner. Take what you need, when you need, if you need.

Roth IRAs are also more flexible before retirement. If you’re under age 59 ½ and take an early withdrawal, it’ll cost you a 10% early withdrawal penalty plus income tax. Roth early withdrawals also trigger a 10% penalty and income tax, but only on the portion of the withdrawal from investment earnings.

If your goal is to leave IRA money for heirs, Roth IRAs also have advantages. A traditional IRA account requires beneficiaries to pay taxes on any money left to them in a traditional 401(k) or IRA. However, those who inherit a Roth IRA can take tax-free withdrawals. Heirs have to take withdrawals. However, the distributions are less likely to create expensive tax situations.

Retirement savers can contribute up to $6,000 in a Roth IRA in 2022. Age 50 and up? You can make an additional $1,000 catch up contribution for a total Roth IRA contribution of $7,000.

If this sounds attractive but you’ve been using a traditional IRA, a Roth conversion is your next step. Roth IRAs are powerful retirement savings tools, however, you will have to pay the income taxes on the amount converted. Try to make the conversion in a year when you’re in a lower tax bracket. You could also convert a small amount every year to maintain control over taxes. If you would like to learn more about retirement planning, please visit our previous posts.

Reference: U.S. News & World Report (April 11, 2022) “10 Reasons to Save for Retirement in a Roth IRA”

Photo by Polina Tankilevitch

Category: Retirement Planning

A Pet Trust will keep your Animals Safe

IRAs can be used to make Charitable Bequests

How Do Inherited IRAs Work?

Business Owners need an Exit Strategy

Managing Finances in a Blended Family

Your Estate Plan should incorporate Asset Protection

Advantages to Establishing a Business Trust

Roth IRAs are Powerful Retirement Savings Tools

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