When it comes to retirement, you want to feel secure. You’ve put in a good few decades of work, and you want to be able to ensure that you’re able to live out the rest of your life comfortably. Estate planning can help you do so. There are several things to consider when you are working retirement into your estate plan. This article will cover the basics when it comes to planning for retirement, but you’ll want to contact an estate planning attorney for more detailed information on your particular situation.
The Relation Between the Two
Technically, a retirement plan should include a good estate plan (as opposed to the other way around). The period during which you are retired is likely to be the one where your estate plan comes into effect. When it comes to retirement, you can plan out your finances through a few tools. The IRA, Roth IRA, and 401(K) are three of the most common—and the most often-conflated.
What is an IRA?
“IRA” stands for “Individual Retirement Account.” The IRA lets you save money for your retirement in a way that is tax advantaged. The IRS wants to encourage responsible money-saving for retirement, and tax-advantaged plans are one way of incentivizing that. A traditional IRA is pretty straightforward. You make contributions to your IRA with money that the IRS will allow you to deduct on your tax return. The earnings on the money in your IRA are then tax-deferred until you withdraw them in retirement. Then, once withdrawn, they are taxed.
What is a Roth IRA?
The Roth IRA differs from a traditional IRA in the taxation. With a traditional IRA, the tax payments are deferred until you withdraw your funds. However, the Roth IRA switches that. You are taxed on the contributions you make into your Roth IRA. Then, when you make withdrawals, those withdrawals are not taxed.
You might want to choose a Roth IRA if you think your taxes will be higher when you are retired than they are now, while you are working (and not spending your IRA). However, there are income limits. You might be barred from opening a Roth IRA if you make too much income. You can only put in $5,500 a year if you’re under 50. People over 50 are capped at $6,500 per year. There is no minimum requirement for either age bracket.
What is a 401(k)?
The 401(k) is another retirement plan that you’re likely to hear a lot of. The 401(k) is qualified, and it allows employees to save and invest their earnings into a retirement plan. Employers sponsor this 401(k). Only employers can sponsor their employees, which makes the plan different from an IRA/Roth IRA, where people sponsor themselves.
The 401(k) is given that name because it is the section of the tax code that sets the plan up. The payments are tax-deferred, and employees contribute untaxed portions of their wages into the plan. When they make a withdrawal, the withdrawals are subject to taxation.
Listing Financial Information
When you’re considering these retirement plans, it’s important to think of the big picture with estate planning. You should make a comprehensive, detailed list of all of your financial tools and beneficiaries when you are creating your estate plan. This not only makes it easier for you to be organized, it helps your family get a clear picture of your finances after you pass on.
Again, these are just the basic definitions of tools for retirement. Consulting with an estate planning attorney will allow you to get a better handle on your estate plan and how the two relate.