Do you feel your life is immersed in uncertainty, more than ever? Every day, new information comes out impacting our future trajectories. This uncertainty can paralyze us. We can’t stay in limbo, thinking that everything will go back to “normal.” Since when was life “normal” anyway?
To feel somewhat in control of your financial future, consider “one next best step.” Ladies, with what remains of 2020, small decisions will lead you in the right direction, giving you agency with your financial lives.
This month, focus on your beneficiary designations on contractual financial tools. These types of tools include life insurance policies, IRA and employer sponsored plans as well as annuity contracts.
The beneficiaries you name on these products trump what you expressed in your will. Monies in these contracts will go directly to beneficiaries and rarely go through the probate process. There are tax implications and withdrawal ramifications around different tools that you need to understand.
Many people quickly fill out a beneficiary form and equalize amongst family members. This is a great place to start, but as the complexity in your financial life grows, you will want to refine your intentions and prepare your heirs.
There are also financial tools that may be better positioned for your philanthropic intentions.
Normally, life insurance death benefits go directly to named beneficiaries income tax free. However, depending on the size of your estate, if you own the policy, it would increase the size of your estate and you may be subject to estate taxes.
It is important to look at the type of policy you have, who owns the policy, and who the beneficiaries are.
The SECURE Act legislation changed the way non-spousal beneficiaries need to take money out of an inherited IRA. No longer allowed to “stretch” distributions over their lifetime, the account needs to be liquidated within 10 years. Money received is taxed as ordinary income.
If a spouse inherits an Employer Sponsored Plan, such as a 401K, they can take withdrawals as needed and avoid the 10% penalty if they are under 59 ½. If a spouse were to roll that 401K over in to their own IRA and need to take money, they would get hit with the 10% penalty.
It is important to get strategic to make sure your wishes are carried out for those you care about.
There are several key pieces to look at with your beneficiary considerations and implications on annuity products.
Do you have living or death benefit riders? Are you currently taking withdrawals, or have you annuitized the contract? Is the contract IRA or non-qualified?
These are complex products. You want to make sure they perform optimally for you first and what you have left to go optimally to heirs.
Find your contracts and look at your current beneficiary designations. What life changes have you experienced since you filled out the original forms? Death, divorce, births, marriages?
Given taxation implications, current legislation rules and personal family objectives, you may want to make some changes.
There are nuances within each of these products around tax implications, and withdrawal strategies that warrant consideration as you discern who you want to inherit what and why. Make sure you discuss options with your financial, tax, and legal professional team.
Financial discussions are hard to have. Combine that with discussions around death and it is easy to sweep those conversations into a corner. Having a framework to move into this space is beneficial. Family meetings can be productive and finding a facilitator to walk alongside you is prudent.
How do you want to be empowered in your financial life right now? Do you think that taking small steps is easier? What other ways can you think of to create some “wins” before the end of the year? Please share your thoughts and tips!