Retirement Savings

Q&A: Trust in the flexibility of living trusts

September 30, 2024 By Liz Weston

Dear Liz: Is naming a beneficiary for a nonretirement, “payable on death” account as effective as putting the account in a living trust? It seems easier than doing all the paperwork each time I open an account, but is it a good idea?

Answer: Both living trusts and payable on death accounts avoid probate, the court process that otherwise typically follows death. But living trusts offer more flexibility and control.

Let’s say you want to benefit two relatives equally, and are leaving a savings account to one and a brokerage account to the other. The balances of the two accounts may be roughly equal today, but could be dramatically different by the time you die. A trust allows you to divvy up your assets regardless of where the money is kept.

Trusts also allow you to put restrictions on how money is spent, which can be important if your heir is a minor child, a spendthrift or someone reliant on public benefits. Payable on death accounts don’t allow restrictions.

Should you become incapacitated, the successor trustee of your living trust could access trust assets to pay for your care. Beneficiaries of payable-on-death accounts can’t get to the funds until you die, so a court procedure may be necessary to provide for you.

After you die, the person settling your estate probably will need money to cover your burial and funeral expenses, pay your bills and final taxes and perhaps get your house ready for sale. If the needed funds have already been distributed to beneficiaries of payable on death accounts, this person might be faced with asking for funds to be returned or paying out of their own pocket, says Jennifer Sawday, an estate planning attorney in Long Beach.

There’s also the piecemeal nature of payable on death accounts. Keeping track of and updating beneficiaries can be a chore. If a beneficiary dies before you, that can create administrative problems as well.

Payable on death accounts can be a low-cost solution for people who don’t have much money and who can’t afford to pay for a trust. If you already have a trust, though, it makes sense to use it.

You typically don’t have to update your living trust every time you open a new account, by the way. Discuss the issue with your estate planning attorney, but typically all that’s needed is to add the account to the schedule of assets that’s usually at the end of your trust document.

Q&A: A retirement catch-22 and health savings accounts

September 23, 2024 By Liz Weston

Dear Liz: My wife and I are withdrawing an unusually large amount from our IRAs in order to make a 20% down payment on the construction of a new retirement home. This withdrawal will, unfortunately, bring our modified adjusted gross income above the limits that will cause increases in our Medicare premiums in 2026. Is there any way to avoid this increase?

Answer: You have the right to appeal an increase in your premiums, but successful appeals usually require someone to have experienced a drop in income due to retirement, a spouse’s death or divorce, for example. A one-time increase in your income — because of a large IRA withdrawal or capital gains from the sale of a home, for example — usually won’t qualify for relief.

As you know, Medicare’s income-related monthly adjusted amount (IRMAA) adds surcharges to Part B and Part D premiums when incomes exceed certain amounts. In 2024, IRMAA starts when modified adjusted gross income exceeds $103,000 for individuals or $206,000 for married couples filing jointly. There’s a two-year delay between when you report your income and when IRMAA increases your premiums.

The good news is that the increase isn’t permanent. If your income goes back to normal next year, so will your 2027 premiums.

Q&A: Health savings accounts offer big tax benefits. The trick is knowing when to use the funds

September 16, 2024 By Liz Weston

Dear Liz: My retirement account covers all my expenses, including medical. I also have $60,000 in a health savings account that is invested in a mutual fund. I’m struggling with how to use that. I could use it for all current medical costs, or just for unexpected big ones. Or I could keep the HSA as backup in hopes of leaving it to my heirs. All options seem to have advantages, and I’m stuck. Your thoughts?

Answer: HSAs offer a rare triple tax benefit: Contributions are deductible, the money grows tax deferred and withdrawals can be tax free if there are qualifying medical expenses.

If anyone other than your spouse inherits the HSA, however, it basically stops being an HSA. The account becomes taxable to the beneficiary in the year you die, which means the HSA loses one of its three tax breaks.

Inheriting an account that’s taxable is probably better than no inheritance at all. But generally it’s better to use the HSA yourself or leave it to a spouse and designate other money for heirs.

Trying to figure out the optimum rate of spending this money is obviously tricky. The longer you leave it alone, the more it can grow. But the longer you live without spending it, the greater the risk you’ll die without taking advantage of those tax-free withdrawals.

If you’re reluctant to tap the HSA, give yourself the option of “deathbed drawdown.” By keeping good records, you may be able to empty the account at the last minute and avoid taxes.

As you may know, you don’t have to incur a qualified medical expense in the same year you take an HSA withdrawal for the distribution to be tax free. As long as the expense is incurred after the HSA is established and before you die, it can justify a tax-free withdrawal, as long as the expense wasn’t reimbursed — paid by insurance or used for a previous HSA withdrawal. So keep careful records of all the medical expenses that you pay out of pocket. If you get a bad diagnosis or your health starts to deteriorate, you can use those receipts to justify a tax-free withdrawal.

Q&A: These major financial decisions shouldn’t be DIY projects. Talk to an expert!

September 9, 2024 By Liz Weston

Dear Liz: I anticipate being dead soon (cancer). I have established an irrevocable trust for my 8-year-old child, with my 47-year-old wife as the trustee. With respect to taxes and other issues and naming beneficiaries, what is the optimal strategy regarding my child for life insurance and traditional and Roth IRAs? My wife will get the 401(k).

Answer: The best person to answer those questions is the estate planning attorney you (presumably) used to create the irrevocable trust. Estate planning should not be a do-it-yourself activity, particularly when minor children are involved. The wrong plan could give too much too soon to your child, or tie up the money too long. You also don’t want to unreasonably stint your wife in your efforts to preserve money for your child. Also, the optimal strategies for tax purposes may not be the best for your family’s situation.

For example, the best way to minimize taxes may be to leave all the retirement money to your wife. Spouses who inherit retirement funds have the option of treating the accounts as their own. That means your wife wouldn’t have to begin required minimum distributions from the 401(k) or the traditional IRA until she’s 75. (The current RMD age is 73, but it rises to 75 for people born in 1960 and later.) She would not have to take distributions from a Roth IRA she inherits from you.

Non-spouse heirs generally have to drain retirement accounts within 10 years. Minors who inherit retirement funds don’t have to take the first distribution until they turn 21, but then the accounts must be emptied within 10 years.

Life insurance proceeds typically aren’t taxable, or payable to a minor child. But you can create a trust to receive and dole out the proceeds to your child. Your estate planning attorney can help you set this up.

Q&A: When temptation to spend an inheritance strikes, what’s the right move?

July 22, 2024 By Liz Weston

Dear Liz: My brother is 54 and has always worked low-wage jobs. He owns a condo thanks to the help of our parents, and his monthly expenses are very low. He’s in a stable position. He does not have any retirement savings or really any other savings to speak of. Recently, he came into an inheritance of $62,000. He has asked my sister and I to help him make that grow and be secure until he retires and chooses to draw on it. What is the best way to help him grow this money in a safe way? We’d like it to be somewhat secured as we all are aware that the temptation to spend it now is strong.

Answer: The first step in investing is understanding your goal for the money and your timeline (how long until you may need the cash).

Your brother likely has at least two goals: an emergency fund and retirement savings.

Financial planners typically recommend an emergency fund equal to three to six months of expenses. A smaller amount can work for people with a lot of other resources, such as stocks they can sell, lines of credit they can borrow against or generous relatives who are willing to help. A larger amount might be smart for people with fewer resources or who might be out of work for extended periods.

Emergency funds need to be accessible, so the money should be in a safe, liquid place such as a bank account. To make the cash less tempting, your brother could consider opening a savings account with an online bank. These banks typically have no minimums and no fees, plus they pay a higher interest rate than their brick-and-mortar kin. Transferring the money to his checking account would typically take a few days, making it less easy to spend on impulse. Another option is to buy certificates of deposit to tie the money up for a set period of time. He can break into the CDs in an emergency but would have to forfeit some interest.

He can take more risk with his retirement funds, as he is likely at least a decade away from retirement. One option is to invest in a low-cost target date retirement fund, which gradually gets more conservative as the retirement date approaches.

Your brother can contribute up to $7,000 this year to an IRA or a Roth IRA. A Roth IRA may be the better option, since he’s unlikely to get much tax benefit from an IRA’s deductible contribution and Roth IRAs don’t have minimum distribution requirements.

He doesn’t have to limit his retirement savings to that annual contribution, however. He could consider investing more with a regular brokerage account and just mentally earmarking it for retirement.

Q&A: Old inherited IRA is safe from “drain it in 10 years” requirement

July 8, 2024 By Liz Weston

Dear Liz: You have written that non-spouse beneficiaries are now required to drain their inherited IRAs within 10 years. Is this requirement retroactive?

I inherited an IRA from my mother in 2015. I have been taking out the minimum required each year. If I must drain the account within 10 years, will the increase in yearly income affect my Social Security benefits?

Answer: The 10-year requirement applies only to accounts inherited from people who died after Dec. 31, 2019.

IRA distributions don’t affect Social Security benefits, but could affect Medicare premiums if the withdrawal is large enough. Taxable income above certain limits triggers a Medicare surcharge known as an income-related monthly adjustment amount, or IRMAA.