Planning with Retirement Accounts

In recent years, classic pensions (with benefits based on years of service and salary levels only) have become less popular, often being replaced by tax-deferred “defined contribution” plans, such as 401(k) plans, deferred-compensation plans and Individual Retirement Accounts (IRAs).  With regular contributions and smart investment, these accounts can help to ensure a comfortable retirement.  And, unlike a traditional pension, the benefits do not end with the worker’s death; anything left in the account can be passed on, fairly easily, to one or more beneficiaries.

Naming Beneficiaries

Beneficiaries are typically named on a form that you fill out when you first get the account, and you can usually change them later on by filling out a similar form. If you are married, your spouse may have to sign also if you want to name someone else as beneficiary. You may be able to name more than one beneficiary, and indicate the portion of the account that will go to each (so you could split an account between several children, equally or unequally, or give a portion to charity).

If you have completed the forms necessary to name a beneficiary for the account, it’s easy for the beneficiary to claim the account after you die, simply by providing the plan administrator with proof of your death and proof of his or her identity. (For this reason, you should keep copies of your beneficiary designations, and the name and phone number of the plan administrator, in a place where your beneficiaries will be able to locate it quickly after you are gone. If you don’t have this information, you may be able to get it from your employer’s human resources department.)  If you have not named a beneficiary at all (or if the named individuals have died before you), the account will pass to your heirs, but it will take longer and could require a costly probate proceeding.

Even after you have named beneficiaries, it is important to review that information periodically. If your family situation changes (someone dies, marries, divorces, etc.), it is very important to check the beneficiaries of all your accounts (not only retirement accounts, but also “pay on death” bank and investment accounts, and life insurance), and make any necessary changes.  For example, if you divorce but don’t remove your former wife or husband as a beneficiary, he or she may still get the account when you die.

Maximizing the Financial Benefit of Tax Deferral

One of the biggest financial benefits of these retirement accounts is that no tax is paid on the money before it is put in, or on the interest it earns, until a withdrawal is made.  Consider an IRA with a balance of $100,000, earning 5% per year; if no withdrawals are made, after 30 years the balance will have grown to over $430,000.  (By way of comparison, (more…)

Published in: on August 23, 2010 at 10:07 pm  Leave a Comment  
%d bloggers like this: