Inevitably, life changes will occur that necessitate modifications to your retirement planning strategies. Ignoring these changes can negatively impact your retirement planning, and could be costly for you and your beneficiaries. The following are some lifestyle changes and some recommended tips on how they may be handled.
Your retirement planning strategies should include your spouse. If your spouse owns retirement savings accounts, ensure that the beneficiary forms for those accounts are updated to name you as the beneficiary. For qualified plans, you are usually automatically considered the primary beneficiary of your spouse's retirement account. However, some plans have a one-year restriction that would prevent you from being automatically deemed the beneficiary until you have been married for at least a year. To prevent any issues, the beneficiary form should be updated regardless of any plan provisions, as complications can arise if someone else is named as beneficiary and wants to challenge the fact that you are the beneficiary by default.
Discuss retirement goals and objectives with your spouse to ensure that you are in agreement and, if you are not, determine where you need to compromise. Your join retirement goal will impact your retirement strategy and allow you to determine the changes that you need to make (if any). The investment strategies for the retirement accounts that are owned by your spouse should be coordinated with the investment strategies for your retirement savings. Additionally, if your spouse has not already taken all the steps that you have, he or she could benefit by using the strategies, services and resources that are available to you.
If your spouse will not have an income-producing job, consider whether you need to fund an IRA for him or her. Up to $5,000 can be added to your spouse's IRA each year ($6,000 if he or she is at least age 50 by the end of the year). This can go a long way towards funding your joint retirement nest egg.
You may be required to share your retirement savings with your spouse if you are divorced or legally separated. This may require significant revision to your retirement goals and objectives. If your spouse is open to the idea, consider whether it is more suitable for you to give up non-retirement assets. Ensure that your beneficiary forms are updated. This should be done even if you want your former spouse to remain the beneficiary, as doing so makes your intention clear and can help to prevent any friction over questions of who really is the beneficiary between your spouse and other interested parties.
If your spouse dies, you must update your beneficiary forms to name a replacement beneficiary. Failure to do so will result in your contingent beneficiaries becoming your primary beneficiary. If there are no contingent beneficiaries, then your beneficiaries would be determined according to the provisions of the agreement that governs your retirement account; which could create estate problems for your beneficiaries.
If you are unmarried (of if you are married but someone other than your spouse is the beneficiary of your retirement account) and your beneficiary dies, your beneficiary designation form should be updated for the same reasons given above.
Births and Adoptions
Consider whether you need to update any beneficiary provisions that name your children as beneficiaries, or whether you need to make new provisions. If your children are your beneficiaries and they are minors, consider designating a custodian beneficiary or guardian who would manage the retirement accounts on their behalf, in the event of your death. The children would be allowed to assume management of the accounts when they reach the age of majority. The age of majority is determined by state law. The cost of education can be high, especially at the tertiary/college level. If plans are not put in place to finance your child's education, and you prefer not to have you and/or your child obtain student loans, you may be forced to use some of your retirement savings, which could force you to postpone your target retirement date. Your options for saving for your child's education include:
- Contributing up to $2,000 per year to an education savings account (ESA). These contributions can be made by anyone, which means that if a family member wants to give the child a gift of cash, it can be added to the child's education fund.
- College savings plans, which allows you to fund accounts or purchase education credit at colleges. The amount that can be added to college savings plans are determined by state law and some states allow deduction for the contributions. The deduction can help to offset the cost of funding the plan.
If you change jobs, consider taking your retirement savings with you. You can either rollover the amount to an IRA or to your new employer's retirement plan, if the plan allows for such rollovers. This will help you to keep track of your savings and make investment and beneficiary changes as needed.
If you decide to roll over amounts from a qualified plan, have the amount paid directly to the receiving retirement plan. If the amount is paid to you, the payor is required to withhold 20% of your taxable amounts for federal income tax. Some also withhold state income tax. In such cases you would be required to make up the withheld amount out of pocket if you want to roll over the entire amount that was withdrawn.
Avoid any temptations to withdraw amounts, as doing so would require you to include the amount in income and pay any income tax due. In addition, you would owe the IRS a 10% early distribution penalty, unless you qualify for an exception. Of utmost importance is the fact that withdrawals could adversely affect your retirement plans, as amounts that you withdraw and spend would no longer be a part of your retirement nest, and the opportunity to earn compound tax-deferred ( or tax free in the case of a Roth ) growth would be lost.
Consider scheduling an annual meeting with your retirement planning counselor, and make sure all life-changing events that occurred over the past year are included in your discussions and revised retirement planning. If you experience a life-changing event before your scheduled meeting, be sure to notify your counselor of the change and request guidance on whether you should make any changes to your planning. Retirement Planning For 20-Somethings: Retirement Resources
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