Changes in Life that Affect Retirement Planning

retirement planning

Retirement planning is a challenging endeavour. With so much uncertainty in life, it pays to give enough thought to retirement plans. Many events take place which we do not expect. Such events can unfold new opportunities and challenges. The right plan and execution can allow one to leverage on the resources one has to improve their future. 

Marriage

Marriage changes the dynamics of one’s financial activities in different ways. It is advisable to make updates to one’s retirement plan beneficiaries after marriage. Laws require written consent to change beneficiaries. After death, benefits of a retirement plan may be paid to named beneficiaries of an individual. 

Rules require a change of beneficiary forms to add beneficiaries. One would need to contact their employer or plan administrator to effect such a change. They require forms to be completed, using the signature of a spouse. 

Divorce

After a divorce, an ex-spouse may be able to receive a portion of a participant’s retirement account balance. In certain cases, the ex-spouse may receive all the retirement assets of their former spouse. Portions of a plan participant’s retirement plan can only be paid under certain conditions. One of such conditions is that an ex-spouse files a Qualified Domestic Relations Order with a plan administrator. 

Many choose to change the beneficiary of a retirement plan after a divorce. In order to change the beneficiary of a retirement plan after a divorce, one would need to contact their employer or administrator and request for new beneficiary forms. After beneficiary forms are changed, they are filled and submitted. A divorce decree copy will also need to be submitted.

Termination of Employment

Termination of employment calls for decision making with respect to whether one wants to leave money in their plan, rollover to a new employment plan, withdraw balance, or rollover to a new IRA

It may be advisable to keep money in a plan if the plan has low fees or more investment options. Many people also choose to move the balance to a new employer’s plan later on. An employer may require an employee to move the balance if it is less than $5,000. 

Rolling over to a new employer allows one to move their balance from an old plan to a new plan. It can be beneficial to rollover to a new employer if it offers better investment options than older plans. In certain cases, consolidation of savings into one plan may give an added advantage. 

It is possible to make a request for a lump-sum distribution after termination of employment. One of the consequences of such a withdrawal is payment of income tax. The tax is on previously untaxed amounts received. Additional 10% early distribution tax may also need to be paid for those who are not over 55. 

Coronavirus Woes and Retirement Planning

Pressure on the economy is compounding as a result of the Coronavirus outbreak. Thus, a growing number of economists have expressed their belief that a recession will take place. In a recession, job losses and great uncertainty cause much confusion which can lead to the wrong financial decisions.

Households should refrain from adding more years to their mortgage if they are refinancing. The loss of a job during a recession can lead to more pressure for those who have more years on their mortgage. In such situations, a lot of people are tempted to sell stocks and other assets to pay off their mortgage. 

During a recession, you can be best served by contributing the maximum amount to your 401(k). This gives you the upperhand in not only boosting your progress in your retirement journey but also in gaining tax advantages, which few people choose to use. 

The Secure Act

The Secure Act went into effect on January 1 2020.  The government introduced new changes which impact how people save and plan for retirement. The Secure Act involves changes which some believe affect people negatively. Others, however, take a more optimistic view. Many believe that the new laws will make it easier for Americans to plan for retirement. 

New Children and Education

One of the provisions of The Secure Act is for individuals to withdraw up to $5,000 to cover costs of new births or adoption. The compliant make distributions within a year. Coupes withdraw $10,000 without penalty. However, they must have separate retirement accounts. While you won’t have to pay a withdrawal fee, taxes must still be paid on pre-tax contributions. Wise planners consider the opportunity cost of compound growth on investments.

Many Americans feel the costs of education for years. The Secure Act allows for people to save money to fund higher education. Fund use includes loans of $10,000 or less. An investment vehicle, 529 accounts makes this possible. 

Inheritance of an IRA

Those who inherit an IRA from an deceased IRA account holder, don’t experience changes under new laws if the account holder passed away prior to January 1 2020. Those who inherit an IRA from an original account holder who dies after December 31 2019 have to empty them within ten years after the death of the account holder. The result of this is that fewer beneficiaries will be able to extend distributions over their lifetime. 

There are five types of beneficiaries who are exempt from the post-death payout rule. Surviving spouses, the chronically ill, disabled individuals, minor children, and beneficiaries not older than 10 years old are exempt from the rule. 

Retirement Planning and Minimum Distributions

The age at which one must begin taking required minimum distributions has increased to 72 from 70 ½. The rule applies to anyone that holds a qualified variable or fixed annuity contract. Roth IRAs require withdrawals only after the death of the owner. 

Most people cannot do without their retirement plans. Sadly a similarly large amount of people do not spend enough time trying to understand how best to benefit from their retirement plan. Financial advisors give years of experience to guide on such matters. Using a tax advisor can save a lot of headaches down the line. It’s never too late to start planning for the years ahead.

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