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The 7 Biggest Concerns For Your Retirement & Estate Planning (part 1 of 3)

With the stock and bond markets in another rollercoaster and tax rates on the upswing, many people are concerned about their retirement planning.  Whether it is a Roth conversion or how to complete a beneficiary designation, we hear many questions from our clients wondering what they should do—and what they shouldn’t!

MA Estate and Retirement Planning

Here are 7 of the some of the biggest issues you should be thinking about with your IRA’s, 401k’s and other retirement plans:

1.    Does a Roth conversion make sense?  

You probably know that 2010 is a special year for people considering converting a traditional IRA to a Roth. In this year there are no MAGI income limitations on how much you can convert. In addition, you have the opportunity to spread out the income tax you pay on your Roth conversion into 2011 and 2012, mitigating the tax bite. That means that if a Roth conversion is going to make sense for your family, now is your time.

But does it make sense? Well, that all depends. When you convert from a traditional IRA to a Roth you are essentially pre-paying the income tax that you would otherwise have paid over a period of years as you took required minimum distributions after age 70 and ½. By paying the tax now you guarantee that any distributions you (or your beneficiaries) take later will be income tax-free.

Is it worth it? It might be, depending on how long you have for the money to grow tax free, what your tax bracket is now and what your tax bracket might be in the future (consider that today’s income tax rates are at historic lows). It also depends on whether you have the cash on hand to pay the tax or if you are planning to use money taken from the IRA to pay it. If you are under 59 ½, money taken from the IRA to pay the tax will be subject to an early withdrawal penalty.

Because there are so many factors involved, a Roth conversion is something you should consider carefully. However, it is most likely to make sense for retirees under one set of circumstances—you don’t think you’ll ever need the money at all and you want to keep it growing tax free as a family legacy!

If between pensions, social security and other investments, some or all of your IRA is money you may never use, you might be targeting it as an inheritance for children and/or grandchildren. But if you live a long time required minimum distributions will mean that you have to take that money out (and pay taxes on it!) whether you need it or not. A Roth conversion will allow you to keep the money growing tax free throughout your lifetime, leaving significant growth for your heirs.

2.    Do you have the right beneficiaries?  

Many people we speak to haven’t looked at the beneficiaries of their IRAs since they first opened the account. They may have changed banks or brokerage houses, had new children or grandchildren, or even lost a spouse, all without ever thinking about what those beneficiary designations will say.

This can be a real problem! If your IRA doesn’t name a beneficiary at all, or names a beneficiary who has since passed away, it will go through probate and deal with all the costs and time delays of the court system AND an income tax payable almost immediately.

If your IRA names the wrong beneficiaries—say an ex-spouse—the consequences might be even more undesirable. Instead of an inheritance, you may have left your family a nightmarish lawsuit!

3.    Is your beneficiary’s inheritance safe?

Like most families we help, you may have taken steps to make sure your IRA reaches your children and grandchildren intact, but if they have problems of their own—divorces, lawsuits, family issues or other creditors—they may never get to enjoy that IRA. 

You may be aware that an IRA you set up for your own retirement has special protection if you are sued or become bankrupt, but an inherited IRA has no protection at all and if left to your child or grandchild outright, the entire amount of the inherited IRA will be vulnerable to all claims of creditors, lawsuits and ex-spouses.

The solution? You can establish an asset protection trust to protect your family legacy and your children.  Request a report by contacting us through our website or by calling our offices at (781) 237-2815.

Parts 2 & 3 are coming soon…To learn more about how the Estate Planning and Asset Protection Law Center can help you protect your retirement accounts for your spouse and future generations, sign up to attend a free Trust, Estate and Asset Protection workshop by calling (800) 964-4295 (24 hours) or registering on our website.