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Estate planning as you enter retirement

This milestone is a good time to make sure your estate plan is up to date—and to prepare for the years ahead.

Passing on your financial assets

As you think about using your assets to benefit your loved ones after you're gone, consider having these items in place.

A will

A will doesn't have to be fancy, but you should have one. Without a will, most of the assets you own will go through your state's probate process, which could be a confusing, drawn-out experience for your loved ones. And it's unlikely that the results will reflect your wishes for your assets.

Retirement plan beneficiaries

If you own an IRA or employer plan account, like a 401(k), you probably designated a beneficiary when you opened it, which could have been decades ago. Take a look at the beneficiaries your financial companies have on file and make sure they reflect your current wishes.

A listing of all your financial information

You can make your passing a little easier on your loved ones by putting together a comprehensive packet of all your financial information and making sure they know where to find it.

Lowering your taxes

If you're interested in lowering the future taxes on your estate, think about whether you could benefit from these items.

A trust

If you need a more sophisticated solution for passing down your assets, consider a trust. It gives you more control, allows you to appoint a corporate trustee to do the administrative work, gives you more privacy than a will, and can lower the amount of your estate that will be subject to taxes.

Roth assets

Converting traditional retirement plan assets to a Roth IRA can be attractive as an estate planning tool for several reasons:

  • Roth IRAs aren't subject to required minimum distributions (RMDs), so they can keep growing until you pass them on to your heirs.
  • Your heirs will then have to take RMDs, but they'll be tax-free as long as the account was open for at least 5 years.
  • The taxes you pay when you convert to a Roth IRA are removed from your estate's value (along with any future earnings you would potentially have had on the tax money if it had remained part of your estate), lowering your future estate taxes.

In addition, converting some assets to a Roth IRA could have tax benefits during your lifetime. Withdrawals from a Roth IRA won't be included in your modified adjusted gross income, so they won't count toward the threshold to subject you to the 3.8% Medicare investment surtax.

They're also not counted as income when determining whether any of your Social Security payments are taxable.

When you convert traditional (pre-tax) money to a Roth IRA, however, the amount of the conversion will count as income for that year and you'll owe income taxes. The conversion could also push you into a higher tax bracket for the year.

We can help you decide whether a conversion makes sense for you.

Planning for your future care

Now is also a good opportunity to plan for the possibility that, at some point, you may no longer be able to make decisions for yourself. Think about putting these directives into place.

A living will

If you have specific instructions for your medical care, make sure they're documented, as there may come a time when you're not able to make these wishes clear to your health care providers.

Place a copy on file with any physician you see regularly, and make sure your family has a copy—and understands what's in it.

A health care proxy

Even if you have a living will, you may someday be in a situation that's not covered by your instructions and unable to speak for yourself.

A health care proxy (also known as a "health care power of attorney") can make medical decisions for you. Obviously, make sure you choose someone who understands your wishes and whom you trust to follow them.

A power of attorney

You can designate someone to have access to your financial accounts by giving him or her power of attorney.

This designation doesn't give someone the right to make health care decisions for you, but a full power of attorney does allow him or her to use your assets to pay your medical bills.

(Someone with limited power of attorney, on the other hand, can see and perform certain actions with your accounts, but he or she can't make any withdrawals.)

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The person or entity designated to receive the proceeds of a pension, investment account, annuity contract, or insurance policy in the event of the owner's death.

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Roth conversion

The movement of money from a traditional IRA or 401(k) to a Roth IRA, essentially changing tax-deferred assets into tax-free assets. When you convert assets, you'll pay income taxes on the amount you convert. After the conversion, withdrawals from the Roth IRA will be tax-free as long as you meet the requirements.

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Roth IRA

A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.

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Required minimum distributions (RMDs)

Annual withdrawals required by the IRS from certain retirement accounts, beginning at age 72 (age 70½ if you attained age 70½ before 2020). RMDs are intended to ensure that the assets in these types of accounts are eventually subject to taxation.

The CARES Act provides a temporary waiver of RMDs for 2020. If you've reached RMD age, you do not have to take your RMD for 2020 if you don't want to.

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Tax-free withdrawals

Money you can take out of your account without owing any federal income tax, even if some of it has never been taxed.

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The investment returns you accumulate on the savings in your account.

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Modified adjusted gross income (MAGI)

Generally, a taxpayer's adjusted gross income calculated without certain deductions and exclusions.